Suppose that in the market you observe that there are four bonuses without default risk, whose characteristics are seen in the following table:

		cash flow	cash flow	cash flow
Bonus	Actual Price	Year 1	Year 2	Year 3
A	$934.15	1000	0	0
B	$879.84	0	1000	0
C	$1130.84	100	100	1100
D	$830.72	0	0	1000

a) Calculate spot or zero rates (r₁, r₂, r₃) and forward rates (₁f₂, ₂f₃).

b) Do you think these bonuses represent an arbitrage opportunity? If so, explain why, and indicate what operations you should do to take advantage of this opportunity.

Answer rating: 100% (QA)

To calculate spot or zero rates and forward rates you can use the information provided for the four ... View the full answer