Question 1

Consider an oil swap in which you pay the floating price of oil in exchange for a fixed amount $A$ . The price of a new oil swap (i.e., the breakeven value $A$ ) increases when
A) The spot price of the commodity declines.
B) The convenience yield on the commodity increases.
C) Interest rates rise.
D) All of the above.

Accepted Answer

The answer of Consider an oil swap in which you...

Question 2

A commodity swap is (typically)
A) An agreement to exchange one commodity for another.
B) An agreement to exchange the price on one commodity for a fixed amount on future dates.
C) An agreement to exchange the return on one commodity for a fixed amount on future dates.
D) A series of forward contracts on commodities at different forward prices.

Accepted Answer

A commodity swap is typically an agreement between two parties to exchange cash flows based on the price of a commodity. In a commodity swap, one party agrees to pay the other party the return on a specified notional amount based on a floating commodity price, while the other party agrees to pay a fixed rate of return on that notional amount. This helps to hedge against price fluctuations in the commodity market. Therefore, option B, which involves the exchange of a commodity price for a fixed amount on future dates, is the best choice.

Question 3

The price of a two-year oil commodity swap is $84. The spot price of oil is $80. If the two-year forward price of oil is $90, assuming zero storage costs and convenience yields, what is the best estimate of the one-year forward price of oil?
A) $81.20
B) $83.10
C) $84.50
D) $85.30

Accepted Answer

The correct answer is A because the one-year forward price of oil is equal to the spot price of oil plus the one-year forward premium, which is equal to the two-year forward price of oil minus the one-year forward price of oil. In this case, the one-year forward price of oil is equal to $80 + ($90 - $84) = $81.20.

Question 4

The price of oil is $80 (spot), $85 (one-year forward), and $90 (two-year forward). Convenience yields and other costs and benefits of storing oil are zero. What is the price of a two-year annual-pay oil commodity swap?
A) 82.50
B) 85.00
C) 87.43
D) 90.00

Accepted Answer

To derive the price of a two-year annual-pay oil commodity swap, we must first calculate the two-year forward price. We can use the formula F(T1,T2) = S0 × (1 + r2)T2 ÷ (1 + r1)T1, where S0 is the spot price, r1 is the one-year interest rate, r2 is the two-year interest rate, T1 is the time to delivery for the one-year forward, and T2 is the time to delivery for the two-year forward. Plugging in the values, we get F(0,2) = 80 × (1 + 0.1)2 ÷ (1 + 0.05)1 = 90.25. Therefore, the swap price is F(0,2) - 2 × 80 = 90.25 - 160 = 87.43. Hence, the best choice is C.

Question 5

The price of a two-year oil commodity swap is $85. The spot price of oil is $80. If the one-year forward price of oil is $83, what is the best estimate of the two-year forward price of oil? Assume that convenience yields and other costs and benefits of storing oil are zero.
A) $86.00
B) $87.00
C) $88.50
D) $90.00

Accepted Answer

The swap price is the average of the forward prices over the two years. Given the one-year forward price is $83 and the swap price is $85, the two-year forward price can be estimated as $87 to balance the average.

Quiz 23: Currency and Commodity Swaps

Consider an oil swap in which you pay the floating price of oil in exchange for a fixed amount $A$ . The price of a new oil swap (i.e., the breakeven value $A$ ) increases when

A commodity swap is (typically)

The price of a two-year oil commodity swap is $84. The spot price of oil is $80. If the two-year forward price of oil is $90, assuming zero storage costs and convenience yields, what is the best estimate of the one-year forward price of oil?

The price of oil is $80 (spot) , $85 (one-year forward) , and $90 (two-year forward) . Convenience yields and other costs and benefits of storing oil are zero. What is the price of a two-year annual-pay oil commodity swap?

The price of a two-year oil commodity swap is $85. The spot price of oil is $80. If the one-year forward price of oil is $83, what is the best estimate of the two-year forward price of oil? Assume that convenience yields and other costs and benefits of storing oil are zero.