Question

Consider the implied forward rate between year 1 and year 2, based on Table 7.1.
a. Suppose that r0(1, 2) = 6.8%. Showhowbuying the 2-year zero-coupon bond and borrowing at the 1-year rate and implied forward rate of 6.8% would earn you an arbitrage profit.
b. Suppose that r0(1, 2) = 7.2%. Show how borrowing the 2-year zero-coupon bond and lending at the 1-year rate and implied forward rate of 7.2% would earn you an arbitrage profit.


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  • CreatedAugust 12, 2015
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