You own a small airline and will require 100,000 barrels of oil in one year’s time, and again in two years’ time. 

(a) Briefly (one sentence) describe a trade (or trades) that would allow you to buy your oil at a fixed price (or prices) known today. 

(b) Briefly (one sentence) describe a trade (or trades) that would allow you to benefit from favorable movements in the price of oil while still hedging against the possibility of bad outcomes. 

(c) The spot price of oil is $80 per barrel. The 1-year forward price of oil is $82. The swap price at which you can enter a two-year oil swap is $84 (entering this swap enables you to buy one barrel of oil each in one year and in two years from now at a price of $84). The 1-year (continuously compounded, annualized) interest rate is 2%. The 2-year (continuously compounded, annualized) interest rate is 3%. What is the 2-year forward price of oil?

Answer rating: 100% (QA)

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