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.

Question

Quizplus · 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, since ($83 + X)/2 = $85, solving for X gives $87.

The Price of a Two-Year Oil Commodity Swap Is $85