Question

The spot price of oil is $80 per barrel and the cost of storing a barrel of oil for one year is $3, payable at the end of the year. The risk-free interest rate is 5% per annum, continuously compounded. Assume that transaction costs are negligible.

Can we give a lower-bound?

What are the difficulties of using the cost-of-carry model for commodities held for consumption?

Answer #1

A lower-bound for the future price = S0ert + cost of storage = 80 x e5% x 1 + 3 = $ 87.10 per barrel

the difficulties of using the cost-of-carry model for commodities held for consumption

- These are held for consumption and not investment
- these items are subjectd to wastage, evaporation losses, shrinkage in volume when stored
- these items are perishable, they may get spoilt while storing

Hence, the cost of carry model may not be suitble for valuation of commodities held for consumption.

The spot price for crude oil is $30 per barrel. The storage cost
is 2.5% per annum. The risk-free interest rate is 7.5% with
continuous compounding. The futures price for a one-year contract
on crude oil should be __________.
A)
$31.59
B)
$32.08
C) $33.16
D) $34.51

The spot price of light, sweet crude oil is $96.24 per bbl., and
the futures price of the NYMEX March light, sweet crude oil futures
contract is $96.37 per bbl. This contract expires in 4 months. The
continuously compounded 4-month risk-free rate is 2.56% per year.
The storage cost is $1.22 per barrel for 4 months, payable in
advance. What is the arbitrage profit per 1,000 bbl.? Ignore
transactions costs.

Using the Black Scholes model. If the current price of oil is
$20.86 per barrel, the risk free interest rate is 2.0%, the cost to
store oil for one year is 10% of the price and the standard
deviation of oil prices is 0.6255, what is the price of a 1-year
call option on oil with a strike price of $34.15 per barrel?

7a. If the current price of oil is $20.86 per barrel, the risk
free interest rate is 2.0%, the cost to store oil for one year is
10% of the price and the standard deviation of oil prices is
0.6255, b. What is the price of a 1-year put option on oil with a
strike price of $34.15 barrel?

6. Suppose a one year oil forward price is $60 per barrel.
Suppose further that there are two equally likely outcomes in one
year---an oil spot price of $40 and an oil price of $80. If the oil
price is $40, the firm’s revenue will be $150 million with 75%
probability and $200 million with 25% probability. If the oil price
is $80, the firm’s revenue will be $200 million with 50%
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a. What is a lower bound for the price of a five-month call
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the strike price is $38, and the continuously compounded risk-free
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b. What is a lower bound for the price of a four-month European
put option on a non-dividend- paying stock when the stock price is
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risk-free interest rate is 7%...

The crude oil futures price expiring in 9 months from now is
$120 while the spot price of crude oil is $115. If the risk-free
rate is 5% and the storage cost yield is 2%, both continuously
compounded annual rates, what is the implied convenience yield of
the crude oil?
A. 1.21% B. 1.28% C. 1.33% D. 2%
E. None of the above

Consider a forward contract for 1,000 barrels of crude oil with
one year to delivery. The current spot price of oil is $60 per
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advance), and the risk-free rate is 5% annually. Assume that there
are no benefits to holding oil at the current time.
What is the fair price for the forward contract? Give your
answer in dollars per barrel, round to the nearest penny.

Show work please
Assume the current spot price for crude oil is $65.25 per barrel
and the futures
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for 1000 barrels.
On Monday, Stacey buys one futures contract from Ben. Both
Stacey and Ben are
speculators in this futures market, whose initial margin
requirement is $6,500 and
whose margin maintenance requirement is $5,000. For hedgers the
initial
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Suppose It is the starting date of the current quarter now.
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as a consumption asset. The risk-free interest rate is 3% per annum
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