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The spot price of oil is $50 per barrel and the cost of storing a barrel...

The spot price of oil is $50 per barrel and the cost of storing a barrel of oil for one year is $3, payable at the end of one year. The risk-free interest rate is 5% per annum with annual compounding. According to the one-year forward price on oil in the market, the convenience benefit of carrying a barrel of oil for one year is estimated to be $2 in terms of the value at the end of one year. This implies that the one-year forward price on oil is $__________ in the market.?

Solutions

Expert Solution

Forward Price = Spot Price(1 + r) + Storage Cost effect - Convenience Yield

Forward Price = 50(1.05) + 3 - 2

Forward Price = $53.50

jeff jeffy answered 2 years ago
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