The spot price of gasoline is 106 cents per gallon and the annualized risk free interest rate is 4.0%. Given a lease rate of 1.0%, a continuously paid storage rate of 0.5%, and a convenience yield of 0.75%, what is the no-arbitrage price range of a 1-year forward contract (in cents)?

Question

Quizplus · Accepted Answer

The no-arbitrage price range of a 1-year forward contract is given by the formula:F = S * e^(r - s - c - y)where:* F is the forward price* S is the spot price* r is the annualized risk-free interest rate* s is the storage rate* c is the convenience yieldPlugging in the given values, we get:F = 106 * e^(0.04 - 0.005 - 0.01 - 0.0075) = 108.96The lower bound of the no-arbitrage price range is given by:F_min = S * e^(r - s - c)Plugging in the given values, we get:F_min = 106 * e^(0.04 - 0.005 - 0.01) = 107.42Therefore, the no-arbitrage price range of a 1-year forward contract is 107.42 to 108.96 cents per gallon.

The Spot Price of Gasoline Is 106 Cents Per Gallon