a) The current price of oil is $63 a barrel. The risk-free rate of return is 5% p.a. (continuously compounded). If the price on a four month forward contract is F_0,4/12 = $67, storage costs are estimated to be 1% p.a. (continuously compounded) and there is no convenience yield, is there an arbitrage opportunity? What is the no-arbitrage price of the forward contract? If arbitrage is possible, design a strategy to take advantage of it. What is the arbitrage profit earned from this strategy?

(6 marks)