What is the one-month forward price of crude oil trading at $ 70 a barrel when annual interest rate is…
Under the cost-of-carry model for commodity forwards, the one-month forward price equals the spot price plus the monthly financing (interest) cost and monthly storage cost.…
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What is the one-month forward price of crude oil trading at $ 70 a barrel when annual interest rate is 6 percent and monthly storage cost amounts to $ 0.60?
Answer and explanation
Correct answer C
Under the cost-of-carry model for commodity forwards, the one-month forward price equals the spot price plus the monthly financing (interest) cost and monthly storage cost. With spot price = $70, monthly interest cost = $70 × (6% / 12) = $70 × 0.005 = $0.35, and monthly storage cost = $0.60, the one-month forward price is $70 + $0.35 + $0.60 = $70.95.
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UGC NET Management