(a) What are the determinants of futures (forward) prices? Explain why stock and commodity futures prices can...
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Question:
(a) What are the determinants of futures (forward) prices? Explain why stock and commodity futures prices can be lower compared to the spot prices. Develop a numerical example for both. (3 marks)
(b) It is December 2019 and the spot price of oil is equal to $60. The December 2020 oil futures market price is equal to $62. Assuming that the risk-free rate is equal to 1% and the cost of carry is equal to -2.3%, calculate the theoretical futures price. Does an arbitrage opportunity exist? If an arbitrage opportunity exists, would you exploit it by buying or selling futures? Describe how you would set up the arbitrage. (5 marks)
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