Consider the implied forward rate between year 1 and year 2, based on Table 7.1. a. Suppose
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a. Suppose that r0(1, 2) = 6.8%. Show how buying 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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