Question
Let us pretend that today was in Oct. 2019. The crude oil futures contract would mature one year later, Oct. 2020; Each contract consists of
Let us pretend that today was in Oct. 2019. The crude oil futures contract would mature one year later, Oct. 2020; Each contract consists of 1,000 barrels, with "Multiplier" = 1000.00; Each contract requires $4,180.00 as the initial margin for traders to long (ie., "buy on margin") or short, with "Margin" = 4180.00; No matter you long or short this commodity today, assume that the price can be settled at $50.68 per barrel, with "Last Price" = 50.68; Your specific brokerage firm will decide the interest rate for cash. Currently the borrowing rate is assumed to be APR = 2.5% per year, while the deposit rate is negligible (APR=0%). And crude oil, of course, pays no interest or dividend at all.
Question B: Your friend Leo predicts crude oil price will drop within the year, and thus invests $4,180 today as margin to short one contract of 1000 barrels @$50.68 per barrel. In other words, Leo invests $4,180 of his own money today, and borrows 1,000 barrels of crude oil from the brokerage to sell for $50.68 per barrel. One year later, if the crude oil price rises to $60.00 per barrel (but the borrowed oil will have no interest or dividend to be due), what shall be the % rate of return on Leo's oil investment?
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