Given the information in the previous problem, how would the trade change if instead the futures price
Question:
Given the information in the previous problem, how would the trade change if instead the futures price for gasoline were $2.95 per gallon?
Problem 17.19
Suppose unleaded gasoline is currently trading at $3 per gallon. You face an interest rate of 4 percent and a carrying cost of $.07 per gallon per month. The current market price of a four-month futures contract on gasoline is $3.50 per gallon. You are evaluating a three-month carry trade opportunity.
a. Determine the present value of the storage costs (PVSC).
b. Identify what the futures price should be under spot-futures parity.
c. Explain the trades necessary to conduct the carry trade and calculate the potential profit per gallon.
Step by Step Answer:
Fundamentals Of Investments Valuation And Management
ISBN: 9781266824012
10th Edition
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin