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The physical market price of jet fuel is $30 per liter. A futures contract on 100,000 liters with settlement in 1 year is currently priced
The physical market price of jet fuel is $30 per liter. A futures contract on 100,000 liters with settlement in 1 year is currently priced at $33.20 per liter. The one-year interest rate is 7% p.a. (continuously compounded) and it costs $0.50 per liter per year (payable at the beginning of each year) to store jet fuel. You can make riskless arbitrage profit of $48,885 (to the nearest dollar) by buying 100,000 liters of jet fuel, storing it and selling one futures contract.
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