Question

1. Suppose that there are no storage costs for crude oil and the interest rate for borrowing or lending is 5% per annum. How could you make money if the June 2020 and December 2020 futures contracts trade at $60.01 and $62.94 per barrel?

Answer 1

Solution :

It is given that the interest rate is 5% per annum and June 2020 future contact is 60.01 and December 2020 contract is 62.94 per barrel.

Let's calculate the price of December contract using interest rate

6-month interest rate = 5%/2 = 2.5%  

Dec 2020 future price = June 20 price * ( 1+ 6-month interest rate ) = 60.01* ( 1+2.5% ) = 61.51

Since the price of December future is 62.94 which is more than the calculated price.

Hence we can make money by borrowing 60.01 and by future contract in June and then sell December future contract at 62.94 and sell at this price.

You have to pay borrowed money and pay the interest of 2.5% on it

Profit = 62.94 - 61.51 = 1.43 per barrel.