Its September 2010. You are an oil distributor, planning to sell 100,000 barrels of crude oil to a client in February 2011 in exchange for a spot price prevailing at that time. Because February 2011 spot price is unknown today, your objective is to hedge this risk. The futures price of crude oil for February 2011 delivery is $97.15. Contract size for crude oil is 1000 barrels. Assume that there is no excessive volatility during delivery month.

a.) What is the no-arbitrage futures exchange rate?

b.)Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 1000 units of a currency.

Now assume that many other traders can follow the arbitrage strategy you described in part b.

1. Will US$/C$ futures exchange rate go up, down?

2. Will US$/C$ spot exchange rate go up, down?