2. In January 2021, the term-structure of spot rates is as follows (with continuous com- pounding):...

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2. In January 2021, the term-structure of spot rates is as follows (with continuous com- pounding): Maturity (years) 1 2 3 Zero-rate(%) 2.0 3.0 4.0 (a) What is the implied forward rate ro(2, 3)? (2 points) (b) A 3-year zero-coupon bond has the face value of $1,000. Consider a 1-year forward contract on this 3-year zero coupon bond. What is the forward price that precludes any arbitrage opportunity? (3 points) (c) Now, consider a 2-year forward contract on the same 3-year zero coupon bond. What is the forward price that precludes any arbitrage opportunity? (2 points) (d) Suppose that an investor takes a long position in the above 1- and 2-year forward contracts. One year later, in January 2022, the term-structure turns out to be as follows: Maturity (years) Zero-rate(%) 3.0 4.0 5.0 1 2 3 What is the value (in January 2022) of the long position in the 1-year forward contract? (3 points) (e) What is the value (in January 2022) of the long position in the 2-year forward contract? (5 points) 2. In January 2021, the term-structure of spot rates is as follows (with continuous com- pounding): Maturity (years) 1 2 3 Zero-rate(%) 2.0 3.0 4.0 (a) What is the implied forward rate ro(2, 3)? (2 points) (b) A 3-year zero-coupon bond has the face value of $1,000. Consider a 1-year forward contract on this 3-year zero coupon bond. What is the forward price that precludes any arbitrage opportunity? (3 points) (c) Now, consider a 2-year forward contract on the same 3-year zero coupon bond. What is the forward price that precludes any arbitrage opportunity? (2 points) (d) Suppose that an investor takes a long position in the above 1- and 2-year forward contracts. One year later, in January 2022, the term-structure turns out to be as follows: Maturity (years) Zero-rate(%) 3.0 4.0 5.0 1 2 3 What is the value (in January 2022) of the long position in the 1-year forward contract? (3 points) (e) What is the value (in January 2022) of the long position in the 2-year forward contract? (5 points)

Answer rating: 100% (QA)

a To find the implied forward rate r023 we need to use the formula for calculating the forward rate based on spot rates 1 r023 23 1 r022 1 r033 Substi... View the full answer