Oil Futures Problem and Arbitrage?
I have a problem for my futures class that I'm absolutely stuck on.
"Find the oil futures prices. Do they seem to meet the condition F = Se^(r-δ)T? Discuss and explain."
To find the oil futures prices, I looked at http://www.cmegroup.com/trading/energy/crude-oil/l... Any help would be appreciated!
Thanks in advance!
- CCLv 49 years agoFavorite Answer
It's right there. (Trading for the oil futures opens at 6:00 m ET on Sundays, so what you see is real time). Looks like they're trading the Oct. contract. That contract has a last trading day of Sept. 21.
Some volitility in the market right now, probably because of the bank reforms that were passed in Europe over the weekend.
As for the formula, sorry, I just trade what I see, I don't calculate fair futures value to cash price.
follow up for John...
the formula is called the spot-future parity, and it tells you what the future price should be (F), given the spot or cash price of the commodity (S), and adding the carrying cost of holding the commodity for later delivery. Those costs involve the riskless return of cash, storage costs, paid dividends (if applicable), all of those (r) computer over the time period involved in th futures contract. (e) is a constant for the base of a natural log, something I've long forgotten. When all is said and done, the price of the futures contract should be no more than the spot price of the underlying, plus all of the carry costs involved for that time period. When either price is out of line, there is an arbitrage opportunity to buy one and sell the other for a "guaranteed" profit. Say oil is at $75. You can buy the oil now at $75 to "lock in" the price until December (cash out of your pocket, so you can't earn interest on that money), pay the storage fees for that oil (your county won't let you store 1000 barrels in your back yard). Lets say the lost interest plus storage costs are $1.50 per barrel over the next 3 months. The Dec. futures contract should sell for around $76.50 per barrel now. If it's selling for say $79 per contract, well, you can buy the oil, forego the lost interest, pay the storage, and come out $2.50 a barrel ahead. If the spot is still $75, but the Dec. contract is selling for $75.80, it would cost you more money to buy and store the oil than it would be for you to just buy the Dec. contract.
- John WLv 79 years ago
You might want to tell us what the letters in the equation mean or even which equation it is (they usually have names for us to google). The lower case e is probably natural e so it's an exponential equation. A lot of growth patterns are exponential or inverse exponential which is why you want to use logarithmic scale on the price axis of your charts, exponential growth shows up as a straight line in a semilog plot so when you draw a straight line on a technical analysis chart you're actually drawing out one of the many equations that apply.
Keep in mind that we're not in your class.