An investor has just taken a short position in a 12-month crude oil forward contract. The oil price today is £62 per barrel, and the risk-free rate of interest is 6.5% per annum with continuous compounding. Storage costs of £2 are paid at the end of 3, 6, and 9 months, respectively.
i. What is the price and the initial value of the forward contract?

ii. If the futures price in the market is £68 what arbitrage opportunities does this create? Show all the calculations.

d) Explain why a long hedger’s position worsens when the basis weakens unexpectedly and strengthens when the basis strengthens unexpectedly.

Answer rating: 100% (QA)

i The price of the forward contract is 62 per barrel and the initial value is 0 ii The arbit rage op... View the full answer