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An industrial producer, IP Inc., is going to buy 100,000 barrels of oil 1 year...

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Finance

An industrial producer, IP Inc., is going to buy 100,000 barrels of oil 1 year from today and 2 years from today. IP Inc. enters an oil swap where IP Inc. pays $110.483/year and receives one barrel of oil each year.

The assumptions are as follows:

Suppose that the forward price for delivery in 1 year is $110/barrel and in 2 years is $111/barrel when IP Inc. entered the swap.

Suppose the 1- and 2-year annual zero-coupon bond yields are 6% and 6.5%

Suppose that immediately after the buyer enters the swap, the forward curve for oil fall by $2 in years 1 and 2. In other words, the year-1 forward price becomes $108, and the year-2 forward price becomes $109. Assume the interest rates remain unchanged.

Compute the new market value of the swap.

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