Question

In: Finance

critically examine how price formation for contracts determines a price for any crude oil.Include a detailed...

critically examine how price formation for contracts determines a price for any crude oil.Include a detailed discussion of crude oil benchmarks

Solutions

Expert Solution

Price formation of the contract will be determining price for the crude oil because it is based upon the rates of the Forward Market and these rates are generally of trading to premium or discount to the current market rates and these will be reflecting that demand of various market participants which will be leading to a forward premium or Forward discount into these rates and prices of contract will be determining the price of the crude oil because these contracts are common consensus of a large group of market participants after trading through a transparent mechanism of commodity exchanges and these commodity exchanges will be providing detail about the demand and supply of these markets because these commodity exchange are often inclusive of such market participants who will be trying to speculate impact of various events on the oil market and then they will be determining the rates of these futures and hence it can be said that these prices are highly futuristic in nature which will be based upon the speculation of a large group of people and hence it can be helpful in determination of oil price

International petroleum exchange is one of the benchmark index on which these oil contract are continuously exchanged and there are other national commodity exchanges on which these all prices are reflected in their own domestic currency and there will be continuously traded in order to find a transparent price after interaction of a large number of market participants and hence it can be said that these prices are reflective of a sentiment of a large group of market and hence they will be helpful in deriving out the actual price of oil


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