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The spot price of West Texas Intermediate (WTI) oil is $43 per barrel.
The fair forward price for delivery of WTI Oil 3 months from now is $45. However, you notice that WTI Oil forward contracts with delivery in 3 months are quoted at $48 per barrel.
What trades are required now to capture this arbitrage opportunity?
Enter a long forward to purchase WTI Oil in 3 months for $48, then short sell a barrel of oil today for $43 and invest the proceeds in the bank.
Enter a short forward to deliver WTI Oil in 3 months for $48, then simultaneously enter a long forward contract to buy oil in 3 months at the fair price of $45.
Enter a short forward to deliver WTI Oil in 3 months for $48, then borrow $43 and buy a barrel of oil today in the spot market for $43.
Enter a long forward to purchase WTI Oil in 3 months for $48, then simultaneously enter a short forward contract to deliver oil in 3 months at the fair price of $45.
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