Question
The continuously compounded interest rate is 6% per annum for all maturities. The one, two and three year forward prices of natural gas are, respectively,
The continuously compounded interest rate is 6% per annum for all maturities. The one, two and three year forward prices of natural gas are, respectively, 5.10, 5.50, and 5.90 $/MMBTU. Consider a swap where a fixed price per MMBTU is exchanged for the spot price of gas in $/MMBTU. Payments will be exchanged once a year for three years. Calculate the swap price. Once you find the swap price calculate the value of the three forward contracts underlying the swap for the party paying the swap price and verify that the sum of all the values of the forward contracts equals zero.
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