Question

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.

Answer 1

Sol) Storage cost = $1.22

and this storage cost paid at starting of the peiod so forward price = (spot price + storage cost) * e^(r*t)

= (96.24 + 1.22) * e^(.0256 * 4/12) = 98.295

Crude price future is $96.37

So one can make arbitrage profit by buying future contract and selling spot.

Abitrage profit = $(98.295 - 96.37) * 1000 = $1925

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