[This is a three-step problem. In the first part, you will solve the numerical problem. In the second part (multiple dropdown menu types), you will construct an arbitrage strategy. In the third part, you will earn a 'free lunch' by generating positive cash flows without taking any risk.]

Problem#1 Part A:

Suppose that in the fixed-income securities market, the two-year and three-year spot interest rates are 8.500% and 10.000%, respectively. [That is, R^Mrkt_0,2 = 8.500% and R^Mrkt_0,3 = 10.000%.]

Then, as per the no-arbitrage principle, what is the current one-year forward rate two years from now? That is what is the (theoretical) value of F^0,Theo_2,1 ?

[Type the answer in numerical format, not in percentages. For example, if your answer is 1.234%, then type as 0.01234. You will not earn any credit if you type as 1.234 or 0.1234.]