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Assume that the following Treasury yield curve is in existence.

Time in Years	Time in Periods	Coupon Rate	YTM	Price	Theoretical Semi-Annual Spot Rate	Theoretical Annual Spot Rate	Implied Semi-annual forward rate	Implied Annual Forward Rates
0.5	1	0.00%	4.50%	$97.79951	2.25%	4.50%	2.55022%	5.1004401%
1	2	0.00%	4.80%	$95.36743	2.40%	4.80%	4.80000%	6.3514618%

Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. (Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time 0 and at the expiration of the futures contract.

Time 0: Borrow at the _______ [ Select ] ["six month spot rate", "six month forward rate", "one year spot rate", "1 year forward rate"]

+$ _______ [ Select ] ["$100,000", "$97,608.59", "$95,367.43", "$97,513.20"]

Buy the _______ [ Select ] ["one year Treasury bill", "one year futures contract", "six month treasury bill", "six month futures contract"] -$ _______ [ Select ] ["$97,608.59", "$97,513.20", "$95,367.43", "$100,000"]

Net cash flow $ _______ [ Select ] ["$0", "$95,367.43", "$97,608.59", "$97,513.20"]

_______ [ Select ] ["Buy", "Sell"] the six-month futures contract

At expiration in 6 mo: Pay back the loan plus interest -$ _______ [ Select ] ["$100,000", "$97,608.59", "$97,513.20", "$95,367.43"]

_______ [ Select ] ["Buy", "Sell"] the bond we own to fulfill the futures contract +$ _______ [ Select ] ["$97,608.59", "$95,367.43", "$100,000", "$97,513.20"]

Net cash flow +$ _______ [ Select ] ["$95.39", "$97,513.20", "$0", "$97,608.59"]

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