Company ABC is a seller of Oil, for which all sales take place at the end of the

year. They wish to stabilize their earnings over the next two years by using a swap. The current

spot price of oil is $100 per barrel. The continuously compounded risk-free rate is 7% (assume

that the yield curve is flat).

5. (12 Points) Company ABC is a seller of Oil, for which all sales take place at the end of the year. They wish to stabilize their earnings over the next two years by using a swap. The current spot price of oil is $100 per barrel. The continuously compounded risk-free rate is 7% (assume that the yield curve is flat). (a) Assuming there are no arbitrage opportunities, calculate the 1-year and 2-year forward prices for oil. [4 points] (b) Using the forward prices from part (a), calculate the 2-year swap price for oil, assuming there is no arbitrage. [4 Points] (c) Assume that the company enters into a swap at the rate calculated in part (b). After a year, the price of Oil has increased to $105, and the risk-free rate has increased to 10%. Calculate the value of the company's swap, given the changes in oil price and the risk- free rate. [4 Points]