The price of oil is $100 per barrel. Oil prices are expected to grow at 4% a year. The one-year risk-free rate of interest is 2% in simple terms. It costs $1 to store a barrel of oil for one year. If oil has no costs or benefits of carry, what is the theoretical one-year forward price of oil?

Question

Quizplus · Accepted Answer

The theoretical one-year forward price of oil is calculated by the formula:
Forward Price = Spot price * (1 + r) - Storage Cost
where r is the risk-free interest rate and the storage cost is $1 per barrel.
So, the theoretical one-year forward price of oil = 100 * (1+0.04) - 1 = $103.02
Therefore, the correct option is C.

The Price of Oil Is $100 Per Barrel