The Total Cost of Storing Oil Calculation
How can we calculate the total cost of storing oil per barrel per year?
Given that the spot price of oil is $99 per barrel, the PV of the storage costs is 5.4% of its price per barrel per year, and the annualized risk-free rate is 2.50% continuously compounded.
Calculation Process:
To calculate the total cost of storing oil per barrel per year, we need to follow these steps:
1. Determine the PV of the storage costs by multiplying the storage cost rate by the spot price of oil:
PV of storage costs = 5.4% * $99 = $5.34 per barrel per year
2. Convert the continuously compounded risk-free rate to a percentage using the exponential function:
Annualized risk-free rate = e^(2.50%) - 1 ≈ 0.0253 or 2.53%
3. Calculate the total cost of storing oil per barrel per year by adding the PV of storage costs and the risk-free rate:
Total cost of storing oil = PV of storage costs + Risk-free rate = $5.34 + 2.53% ≈ $5.34 + $2.50 ≈ $7.84
The total cost of storing oil per barrel per year is approximately $7.84. This calculation takes into account both the present value of storage costs and the annualized risk-free rate. By understanding this calculation, businesses and individuals can make informed decisions regarding oil storage and investment strategies.
It is essential to consider all factors, including spot prices, storage costs, and risk-free rates, when determining the total cost of storing oil. By following the calculation process outlined above, individuals can accurately assess the financial implications of oil storage and make strategic decisions based on this information.
Understanding the total cost of storing oil calculation is crucial for anyone involved in the oil industry or investment activities related to oil. By incorporating this calculation into financial planning and decision-making processes, individuals can optimize their investments and mitigate risks effectively.