The forward prices on a barrel of crude oil are $43 and $45 in years one and two, respectively. The interest rates on zero coupon government bonds are 4.0% and 4.5% in years one and two, respectively. What is the likely 2-year swap price on a barrel of crude oil?

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The correct answer is B. The 2-year swap price on a barrel of crude oil is $43.97. This is because the forward price of a barrel of crude oil in year one is $43, and the interest rate on a zero coupon government bond in year one is 4.0%. This means that the present value of the forward price of a barrel of crude oil in year one is $43 / (1 + 0.04) = $41.54. The forward price of a barrel of crude oil in year two is $45, and the interest rate on a zero coupon government bond in year two is 4.5%. This means that the present value of the forward price of a barrel of crude oil in year two is $45 / (1 + 0.045) = $43.08. The 2-year swap price on a barrel of crude oil is the present value of the forward price of a barrel of crude oil in year one plus the present value of the forward price of a barrel of crude oil in year two. Therefore, the 2-year swap price on a barrel of crude oil is $41.54 + $43.08 = $43.97.

The Forward Prices on a Barrel of Crude Oil Are