Finance stock computation question

Problem 1 (7 points):

  1. a) During regular trading hours, go to to look up Crude Oil WTI futures prices at Choose two future months (preferable at least several months apart) for which recent trades were made (do not use two consequent months and do not use cash price). Record the following information:

  • the day and time you collected your data

  • the two months you have chosen

  • the price at which the last contract for each month was traded

  1. b) Assume that futures are equal to forward prices and forward prices satisfy F=S*. Estimate r.

  2. c) Given the current interest rate in the market and taking into account possible transaction costs, if forward prices for oil were, indeed, to satisfy F=S*, your estimated interest rate should be around 1%. Is your estimated interest rate is higher or lower than 1%? It must be different from 1% because oil is a consumption asset with storage cost, so the forward price equation F=S*cannot be applied to oil forwards. Do you think the specific relationship between your estimate of r and 1% is because of the storage costs or because oil is a consumption asset? Support your answer with rigorous proof using the appropriate futures price formula. (Note: your answer cannot be “both”)



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