Problem Consider a firm plans to buy 20,000 barrels of oil in May of 2008. Let the possible oil price per barrel in May are 42.55, 44.55, and 46.55. To hedge against possible price fluctuation in oil prices, the firm is considering investing in oil futures contract. The oil futures price is 44.55 in May. A. Compute the number of futures contract the firm needs to consider, if each contract calls for a delivery of 1000 barrels. State whether the firm needs to sell or buy futures contract to hedge against possible price fluctuations. B. Show that the net cost of the firm to purchase 20,000 barrels of oil remains same for different oil prices in May after taking the hedged position. What will be the total cost to purchase 20,000 barrels of oil after taking the hedged position with futures contract? Problem The one year futures price on S&P index is 303. The S&P index is currently traded at 300 and the index portfolio pays a dividend yield of 3% annually. The T-bill rate is 6%. A. By how much the futures contract is mispriced? B. Construct an arbitrage strategy to exploit the mispricing and show that your profits in one year will equal the mispricing in the futures market.