The yield of the 1-year treasury is 3%. The yield of the 2-year treasury is 3.6%....

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The yield of the 1-year treasury is 3%. The yield of the 2-year treasury is 3.6%. The 1-year forward rate in one year is 4%. Is there any arbitrage opportunity? If yes, how would you trade to capture this opportunity if you do not have any cash? Yes. Short sell the 1-year Treasury, and use the proceed from short sell to buy the 2-year treasury now. Short sell 1-year treasury in one year to cover the payment for the short sell transaction happened now. No. Yes. Short sell the 2-year Treasury, and use the proceed from short sell to buy the 1-year treasury now. In one year, use the proceed from the first 1-year treasury to buy another 1-year treasury. Yes. Short sell both the 1-year and 2-year treasuries. Use the proceed from short selling to buy 1-year treasury in one year. The yield of the 1-year treasury is 3%. The yield of the 2-year treasury is 3.6%. The 1-year forward rate in one year is 4%. Is there any arbitrage opportunity? If yes, how would you trade to capture this opportunity if you do not have any cash? Yes. Short sell the 1-year Treasury, and use the proceed from short sell to buy the 2-year treasury now. Short sell 1-year treasury in one year to cover the payment for the short sell transaction happened now. No. Yes. Short sell the 2-year Treasury, and use the proceed from short sell to buy the 1-year treasury now. In one year, use the proceed from the first 1-year treasury to buy another 1-year treasury. Yes. Short sell both the 1-year and 2-year treasuries. Use the proceed from short selling to buy 1-year treasury in one year.

Answer rating: 100% (QA)

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