The cash flows for executing the above trade are as shown below: Time Trade Cash flow t=
Question:
The cash flows for executing the above trade are as shown below: Time Trade Cash flow t= 0 Short sell oil future at t=0 0 t= 0 Borrow $20 at t=0 at 1% Rf 20 t= 0 Buy oil in spot market -20 T= 180 Payback borrowed amount and also Pay 1% interest & 7% storage costs at end of 6 months -20.78 T= 180 Deliver physical oil to futures conterparty at $25 25 Net cash flows (Profit) $ 4.22
#2. Using the data from problem one, now assume the cash price for oil is -$40 (the spot price). Answer the following questions again. In this one you will have to think. a. What is the Implied futures priceb. If the Implied futures price is different from the futures price what should your strategy be? c. If there is a profit opportunity, find the profit. d. Show all cash flows. e. What would be the major problems with undertaking this strategy?
Expert Answer:
a Implied Futures Price To find the implied futures price you need to consider the arbitrage opportunity that would equalize the cost of carrying the ... View the full answer
