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Problem:

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.

(a) 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?

(b) 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.

Summary of problem:

This question basically belongs to Finance as well as it discusses about calculation of forward price for crude oil.

Total Word Limit: 140 Words

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