Suppose that 10 years from now it becomes possible for money managers to engage in time travel. In particular, suppose that a money manager could travel to January 1981, when the 1-year Treasury bill rate was 12.5%.
a. If time travel were costless, what riskless arbitrage strategy could a money manager undertake by traveling back and forth between January 1981 and January 1982?
b. If many money managers undertook this strategy, what would you expect to happen to interest rates in 1981?
c. Since interest rates were 12.5% in January 1981, what can you conclude about whether costless time travel will ever be possible?

  • CreatedAugust 12, 2015
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