Asked by Regina Andres on Jun 10, 2024
Verified
A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%.
The 1-year oil futures price should be equal to ________.
A) $68
B) $70.21
C) $71.25
D) $74.88
Oil Futures
Contracts to buy or sell oil at a predetermined price on a specified future date, used as a financial instrument for hedging or speculative purposes.
Risk-Free Rate
This rate is considered the minimum return investors expect for any investment, since they would not take on additional risk without the prospect of higher returns, often pegged to government-issued securities.
- Determine the profits from arbitrage activities and acquire an understanding of the principles governing futures pricing and the potential for arbitrage in the realm of financial markets.
Verified Answer
GD
Gabriel DeBoerJun 15, 2024
Final Answer :
B
Explanation :
Parity F0 = S0(1 + rf − d)T = $68(1 + 0.0325 − 0)1 = $70.21
Learning Objectives
- Determine the profits from arbitrage activities and acquire an understanding of the principles governing futures pricing and the potential for arbitrage in the realm of financial markets.