Question: Using daily USD/ series in the file Assignment_2_DATA.xlsx, compute the arbitrage free 1, 3, and 6 month forward rates. NOTE that interest rates are quoted

Using daily USD/ series in the file Assignment_2_DATA.xlsx, compute the arbitrage free 1, 3, and 6 month forward rates. NOTE that interest rates are quoted as annualized rates (e.g. the applicable one month rate would be annualized one month rate * 30/360). Plot the percentage deviations of actual forward rates from theoretical values. When do you see the largest deviations? Why?

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Date Spot F 1M F 3M F 6M i_UK 1M i_UK 3M i_UK 6M i_US 1M i_US 3M i_US 6M
1986-01-02 1.4505 1.4393 1.4303 1.418 11.750% 11.875% 11.875% 8.125% 8.000% 8.000%
1986-01-03 1.438 1.4355 1.4268 1.4142 11.813% 11.875% 11.875% 8.125% 8.063% 8.063%
1986-01-06 1.4355 1.4373 1.4287 1.4159 11.750% 11.906% 11.938% 8.188% 8.125% 8.125%
1986-01-07 1.4395 1.436 1.4267 1.4125 11.750% 12.031% 12.063% 8.125% 8.125% 8.125%
1986-01-08 1.4433 1.439 1.4287 1.4146 12.250% 12.500% 12.500% 8.000% 8.000% 8.000%
1986-01-09 1.45 1.4392 1.4284 1.4143 12.875% 12.938% 12.875% 8.188% 8.188% 8.188%
1986-01-10 1.4545 1.4522 1.442 1.428 12.750% 12.875% 12.688% 8.250% 8.250% 8.250%

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