Problem A. Construct a Replicating Portfolio (RP) to replicate a 1.5-year Bond-0 that pays 7.8 percent of coupon per year. The available bonds for replication are: a one year zero coupon Bond-1, a 1.5-year Bond-2 that pays 5.8 percent coupon per year, and a 1-year Bond-3 which pays 9.8 percent coupon per year. All the bonds (Bond-0, Bond-1, Bond-2, and Bond-3) havethe same face value of $100 and pay their annual coupons two times a year.Compute an arbitrage trading strategy to generate profits, if any, when the current market prices of the four bonds, respectively, are 101.8, 97.1, 100.45 and 104.16

1. What is the dollar face value of Bond-1 in the RP?

2. What is the dollar face value of Bond-2 in the RP?

3. What is the dollar face value of Bond-3 in the RP?

4. What is the cost of the RP?

5. What is the arbitrage fair price of Bond-0?

6. Write 1 if Bond-0 is to be held long and 0 if Bond-0 is to be held shorting arbitrage trading strategy.

7. Write 1 if Bond-1 is to be held long and 0 if Bond-1 is to be held shorting an arbitrage trading strategy.

8. Write 1 if Bond-2 is to be held long and 0 if Bond-2 is to be held shorting an arbitrage trading strategy.

9. Write 1 if Bond-3 is to be held long and 0 if Bond-3 is to be held shorting an arbitrage trading strategy.