On May 15, 2000, you enter into a forward rate agreement (notional = $100) with a bank for the period of November 15, 2000 to May 15, 2001 (6 months later to 1 year later). The current price of a 6-month zero coupon bond is $96.79 and the current price of a 1-year zero coupon bond is $93.51.

1. What must the forward rate agreed upon be so that there is no arbitrage? Calculate f(0,0.5,1)

2. What is the value of the forward at inception (i.e. at time zero, or today).

3. Suppose that three months have passed, so it is August 15, 2000. You are given the following data:

Maturity Date Z(0,T)

Nov 2000 (3 months) 0.9844

Feb 2001 (6 months) 0.9690

May 2001 (9 months) 0.9531

Aug 2001 (12 months) 0.9386

What is the value of the forward agreement? Round to three digits after the decimal. Remember that the notional is $100.