Question: Exercise 4 (2 marks). Suppose the current ZCB prices for maturity in two years and in five years are 0.8 and 0.7, respectively. Suppose the

Exercise 4 (2 marks). Suppose the current ZCB prices for maturity

Exercise 4 (2 marks). Suppose the current ZCB prices for maturity in two years and in five years are 0.8 and 0.7, respectively. Suppose the two-year forward three-year libor rate is 0.04. Determine if there is an arbitrage opportunty. If so, find an arbitrage portfolio. Make sure that you verify the portfolio is an arbitrage portfolio

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