The price of a barrel of crude oil is currently $60. The 6-month risk free interest...

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The price of a barrel of crude oil is currently $60. The 6-month risk free interest rate is 5.00% (APR). The current cost of storing a barrel of oil for the next 6 months is $1.50, payable today. a. (3 pts) If the market places a value today of $3 on the benefits of physical ownership of a barrel of oil over the next 6 months, determine the futures price of a barrel of oil for delivery in 6 months. b. (3 pts) If you were an oil user and wanted to hedge your oil price risk, determine whether you would want to buy the oil futures contract (take delivery) or sell the oil futures contract (make delivery). Explain how the futures position you would take acts as a hedge to your future need to purchase oil for your business activity. c. (5 pts) Suppose that in 6 months a reasonable forecast for the uncertainty in the price of a barrel of oil is that a barrel of oil could trade for $90 or $51. If someone is offering a 6-month (European style) call option on a barrel of oil with a strike (exercise) price of $75, determine the market value (premium) on this option today. (Please use a binomial pricing method). d. (2 pts) Determine the price of the corresponding put option on a barrel of oil (6-month maturity, exercise price of $75 per barrel). e. (2 pts) If the risk-free interest rate had been 2.5% (APR) as opposed to 5.00%, determine the impact on the price of the call option in part (c). Provide an economic rationale for this price difference. The price of a barrel of crude oil is currently $60. The 6-month risk free interest rate is 5.00% (APR). The current cost of storing a barrel of oil for the next 6 months is $1.50, payable today. a. (3 pts) If the market places a value today of $3 on the benefits of physical ownership of a barrel of oil over the next 6 months, determine the futures price of a barrel of oil for delivery in 6 months. b. (3 pts) If you were an oil user and wanted to hedge your oil price risk, determine whether you would want to buy the oil futures contract (take delivery) or sell the oil futures contract (make delivery). Explain how the futures position you would take acts as a hedge to your future need to purchase oil for your business activity. c. (5 pts) Suppose that in 6 months a reasonable forecast for the uncertainty in the price of a barrel of oil is that a barrel of oil could trade for $90 or $51. If someone is offering a 6-month (European style) call option on a barrel of oil with a strike (exercise) price of $75, determine the market value (premium) on this option today. (Please use a binomial pricing method). d. (2 pts) Determine the price of the corresponding put option on a barrel of oil (6-month maturity, exercise price of $75 per barrel). e. (2 pts) If the risk-free interest rate had been 2.5% (APR) as opposed to 5.00%, determine the impact on the price of the call option in part (c). Provide an economic rationale for this price difference.

Answer rating: 100% (QA)

SOLUTION a The futures price of a barrel of oil for delivery in 6 months can be determined by considering the cost of carrying the oil storage cost an... View the full answer