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 you observe a one-year forward price of oil of $98, what inference could you draw?
A) The forward price is wrong and an arbitrage is possible.
B) There may be a benefit of carry in the oil market.
C) The market is in contango.
D) Demand for oil is expected to fall in a year.
Correct Answer:
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