James has strong view that the oil price in three years' time will be very high. He plans to use a three-year oil forward to speculate. Following information is collected from the market. Year 1 2 3 Zero Coupon Bond Price 0.9895 0.9856 0.9782 Oil Swap Price 42 42.5 43 (a) (8 points) Suppose market is well functioning with no transaction cost and James can freely take long or short position in oil forward. What is the price of 3-year forward on oil? Should James long or short the 3-year forward contract? (b) (8 points) Suppose the market information one year later is as follows, what is the market value of James' forward position? year 1 2 Zero Coupon Bond Price 0.9808 0.9750 Oil Swap Price 42.2 42.8