Question

Let us pretend that today was in Oct. 2019. The crude oil futures contract would mature one year later, Oct. 2020;

Each contract consists of 1,000 barrels, with "Multiplier" = 1000.00;

Each contract requires $4,180.00 as the initial margin for traders to long (i.e., "buy on margin") or short, with "Margin" = 4180.00;

No matter you long or short this commodity today, assume that the price can be settled at $50.68 per barrel, with "Last Price" = 50.68;

Your specific brokerage firm will decide the interest rate for cash. Currently the borrowing rate is assumed to be APR = 2.5% per year, while the deposit rate is negligible (APR = 0%);

And crude oil, of course, pays no interest or dividend at all.

Question A:

You predict crude oil price will rise within the year, and thus invest $4,180 today as margin to buy one contract of 1000 barrels @$50.68 per barrel.

In other words, you invest $4,180 of your own money today, and borrow the rest in cash from the brokerage to buy 1000 barrels @$50.68 per barrel.

One year later, if the crude oil price rises to $60.00 per barrel and the intest expense on borrowed cash becomes due, what shall be the % rate of return on your oil investment?

Answer 1

Gain on contract per barrel = $60.00 – $50.68 = $9.32

Total Gain on contract = $9.32 * 1,000 = $9,320

Fund Borrowed = $1,000 * $50.68 = $50,680

Interest on borrowed fund = $50,680 * 2.5% = $1,267

Percentage of rate of return on oil investment = Net Income / Total Investment

Net Income = $9,320 - $1,267 = $8,053

Total Investment = $50,680 + $4,180 = $54,860

= 8,053 / 54,860 *100 = 14.68%

The rate of return on your oil investment should be 14.68%

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