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Assume that the prices of the 1-year and 2-year forward contracts for oil are $36 and $40 per barrel, respectively. The prices of the 1-year
Assume that the prices of the 1-year and 2-year forward contracts for oil are $36 and $40 per barrel, respectively. The prices of the 1-year and 2-year zero-coupon bonds are 0.9878 and 0.9749, respectively. a. What is the price of a 2-year swap? b. Suppose you are the swap counterparty for an oil buyer who uses this 2-year swap to hedge. Immediately after the swap contract is signed, the prices of 1-year and 2-year forward contracts for oil both increase by $2 per barrel. Assume there is no change of zero-coupon bond prices, what is the market value of your swap position? c. As the swap counterparty for an oil buyer who uses this 2-year swap to hedge, what is the risk you are facing and how do you hedge
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