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anaruiz00
anaruiz00
18.11.2019 • 
Business

Suppose that the spot price of oil is us$95 and the quoted 1-year futures price of oil is us$125. note that a quote is the last price at which a security or a commodity traded, that is, the most recent price on which a buyer or a seller agreed and at which some amount of the asset was transacted. therefore, bid and ask quotes are the most current prices at which the security or the commodity can be bought or sold. for this exercise just assume that bid=ask=quote.

assume also that the risk-free interest rate is 5% per annum with discrete compoundingfor all maturities. moreover, the storage cost of oil are 2% per annum and based on the spot price. show that there is an arbitrage opportunity and the profit of this arbitrage is equal to $23.35. for full credit you must show all the steps, explain the strategy you would put into practice to take advantage of this arbitrage opportunity and explain what is the source of the arbitrage gain. this exercise was done and discussed in lecture class.

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