Question1

(a)

Data sourced from Ifess (Integrated Fasttime Equity System) has given the following swap rates. Think of these swap rates as spot interest rates.

Swap maturity	30 June 2021	30 June 2022
1 year	1.75	2.15
2 year	1.95	2.50
3 year	2.25	3.05
4 year	3.15	3.65
5 year	3.25	3.70

(i) Using the data as given on 30 June 2021, calculate the relevant forward rates. State exactly what information each of these forward rates gives.

(ii) Now using the data from the table for 30 June 2022 state the 1-year, 2-year, 3-and 4-year year spot rates that prevailed on that date. What appears to have happen?

(iii) Using the data as given on 30 June 2022, calculate the relevant forward rates.

(b)

What are the three main financial risks banks face? How are they linked and what is the role of asymmetric information in creating liquidity risk?