Assume corn forward prices over the next 3 years are $2.25, $2.35, and $2.28, respectively. Effective annual interest rates over the same period are 5.2%, 5.5%, and 5.8%. What is the 2- year swap price on a hypothetical ʺforward swapʺ that begins at the end of year 1?
A) $2.14
B) $2.32
C) $2.41
D) $2.53

Question

Quizplus · Accepted Answer

The 2-year swap price is calculated by taking the weighted average of the forward prices for years 2 and 3, discounted by the interest rates. The formula is: Swap Price = (F2 / (1 + r1)) + (F3 / ((1 + r1) * (1 + r2))) / (1 / (1 + r1) + 1 / ((1 + r1) * (1 + r2))). Plugging in the values: Swap Price = ($2.35 / 1.052) + ($2.28 / (1.052 * 1.055)) / (1 / 1.052 + 1 / (1.052 * 1.055)) = $2.32.

Assume Corn Forward Prices Over the Next 3 Years Are