Lesson 2 Exercise 1: Application to the MPC Pricing Question in Overview

How would you check if the forward price of $100 is arbitrage-free? [Hint: Devise an equivalent forward contract on 1/9/2012 using the crude oil spot market and the financial market for borrowing or lending. To simplify the analysis, assume the storage cost of crude oil is zero.]

This exercise provides you with an opportunity to review some concepts of forward contracts on an underlying asset with no income, no storage cost. Please attempt to solve the question on your own and then submit your work to the Lesson 2: Exercise 1 Drop Box to retrieve the solution to the question. The solution is a locked file and can only be accessed once you have submitted your work to the Lesson 2: Exercise 1 Drop Box.

Review your answers in comparison to the solution. If you have wrong answers to the question, you should revisit the forward contracts concepts presented. And, if you still have difficulties understanding the material and why you made mistakes, please contact me.