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The price of crude oil is currently $71.67 per barrel. The forward price for delivery in one year is $86.43 per barrel. An arbitrageur can
The price of crude oil is currently $71.67 per barrel. The forward price for delivery in one year is $86.43 per barrel. An arbitrageur can borrow money at 4.38% per annum. There are 100 barrels of oil in each forward contract.
Assume that the cost of storing crude oil is $0 and crude oil provides no income during this time period.
A. Is this forward curve in contango or backwardation and explain why?
B. Could this scenario be profitable? What should the arbitrageur do and why? (Show calculations)
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