Question 3. In a 3 year oil swap, a dealer is paying fixed price and receiving floating. The question asks what position in oil frwd contract will hedge oil price risk? The answer says he enters into short frwd positions. How do we know that he has to take short position in frwd and not long? In question 4, When determining the cumulative overpayment after the second swap settlement, how did they get the interest rate of 1.070024? I couldn’t understand this reading. May be your solutions could help me understand. I couldn’t understand the payoffs when a dealer is a counterparty. Any inputs would be greatly appreciated Thanks

1.065^2/1.06 = 1.070024

1.07^3 / 1.065^2 = 1.080071

It is the 1 year forward rate one year from now concept (Level I - Fixed Income - Forward Rates calculation stuff).

Got it! Thanks cpk.