Spot price of crude oil is 83.84/bbl. The total interest rate on six-month loans and deposits is 0.84%. The storage cost is 0.33% of the asset value per month paid at the end of the storage period. Assuming no transaction cost, determine the no-arbitrage price for a crude oil futures contract maturing six months from now.
A futures contract is a standardized agreement between two parties to buy or sell a specific underlying asset at a predetermined price and date in the future. The underlying asset can be commodities, such as crude oil, gold, or agricultural products, financial instruments, such as stocks, bonds, or currencies, or even certain market indices.
Futures contracts are traded on organized exchanges, such as the Chicago Mercantile Exchange (CME) or the New York Mercantile Exchange (NYMEX), where the terms of the contract, including the underlying asset, contract size, delivery date, and price, are standardized.
Unlike options contracts, which give the holder the right but not the obligation to buy or sell the underlying asset, futures contracts require both parties to fulfill their obligations on the contract's delivery date. This means that the buyer of a futures contract is obligated to take delivery of the underlying asset at the agreed-upon price, and the seller is obligated to deliver the asset at that price.
Futures contracts are used by market participants to hedge against price movements in the underlying asset, speculate on the direction of the price, or gain exposure to an asset without physically owning it.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
