Oil is selling at a spot price of $42.00 per barrel.Oil can be stored at a cost of $0.42 per barrel per month.The opportunity cost of capital is 7.2% per year (or 0.6% per month).What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $43.00 per barrel,instead of hedging with a forward contract?

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Quizplus · Accepted Answer

The cost of storing oil for 2 months is $0.84 ($0.42 per month), and the opportunity cost of capital for 2 months is $0.504 ($42 * 0.012). The total cost is $1.344. The spot price increase is $1.00 ($43 - $42), resulting in a $0.35 gain ($1.344 - $1.00).

Oil Is Selling at a Spot Price of $42