a. Suppose that oil forward prices for 1year and 2 years are $110 and $95. The one- year effective annual interest rate is 2.7% and the two-year rate is 3%. What is the two-year swap price?
b. Suppose you observe a swap price of $100 instead of the result you calculated ina). Construct a portfolio that allows you to make a risk-free profit based on this mispricing and calculate the amount of that profit.