Question

Suppose that there are no storage costs for crude oil and the interest rate for borrowing or lending is 5% per annum. How could you make money if the June and December futures contracts for a particular year trade at $60 and $66, respectively

Answer 1

$4.50

Step-by-step explanation:

In order to make a profit from the futures contracts, it would be appropriate to take a long position in the June futures contract(buy) and take a short position in the December futures contract.

The investor would borrow $60 today which would necessitate paying back $60 plus a half-year in interest payment.

loan repayment=$60*(1+5%/2)=$ 61.50

In December, sell crude oil at $66 and repay the loan principal and interest

profit=$66-$61.50=$4.50