An investor enters into a 2-year swap agreement to purchase crude oil at $51.25 per barrel. Soon after the swap is created, forward prices rise and the new 2-year swap price is $61.50. If interest rates are 1% and 2% on 1- and 2-year zero coupon government bonds, respectively, what is the gain or loss to be made from unwrapping the original swap agreement?

The present  Value of Annual Gain for  two years made from unwrapping the original swap agreement is  $20.00

Explanation:

From the given information;

The annual gain from swap agreements = $61.50 - $51.25

The annual gain from swap agreements =  $10.25

Annual rate for the first year = 1% = 0.01

Annual rate for the second year = 2% = 0.02

However the present gain for the first year will be;

= 10.14851485

The present gain for the second year will be;

= 9.851980008

The present Value of Annual Gain for  two years is:

=  10.14851485  + 9.851980008

= 20.00049486

≅ $ 20.00

The present  Value of Annual Gain for  two years is $20.00

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