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

1.What is an upper bound for the one-year futures price of oil?

2.Can we give a lower-bound?

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

 

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1 Upper bound for 1year futures price of oil The upper bound occurs if the spot price increases by t... View the full answer