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The current spot price of 1 barrel of crude oil is $120, the 1.75-year spot rate is 5% (c.c.), the (continuous flow of) storage costs
The current spot price of 1 barrel of crude oil is $120, the 1.75-year spot rate is 5% (c.c.), the (continuous flow of) storage costs of crude oil is 1% per year. In absence of arbitrage, what should be the forward price to trade crude oil in 1.75 years if crude oil was an investment asset? Assume crude oil is a consumption asset. Is there an arbitrage if the forward price to trade 1 barrel of crude oil in 1.75 years is $140? If so, describe an arbitrage strategy. What is the convenience yield if the true forward price to trade 1 barrel of crude oil in 1.75 years is $110
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