An oil company expects to sell 1 million barrels of oil every year for the next 5 years and wants

to lock in the oil price.

a. Compute the swap price if the forward prices for oil are 58.7 , 59 , 59.3 , 60 and 60.5 for

maturities from 1 to 5 years respectively, and the risk-free rates are 5.5% , 5.8% , 6% ,

6.2% and 6.5% for maturities from 1 to 5 years respectively ( all with continuous

compounding).

b. What should be the terms of this swap between the oil company and the swap dealer?

c. Explain how the oil company is locking in the oil price. Give some examples.