The 6-month futures price of oil is currently $72.50 per barrel and the risk-free rate is 7%. The oil will provide $12 of income every 6 months, but it will cost $9 every 3 months to store it. The storage costs and income will be collected at the end of each period. Currently, an oil-forward contract with a 12-month maturity is priced at $69.25. Assume continuous compounding.

a) Is the market at, above, or below full carry? Is this an example of the basis or the spread?

b) Explain the process of taking advantage of this arbitrage opportunity and the resulting gain or loss