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  3. consider the following spot rate curve: s1 s2 s

Consider the following spot rate curve: s1 s2 s3 s4 s5 0.050 0.055 0.061 0.066 0.075 (a) What is the forward interest rate that applies from...

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Finance

Consider the following spot rate curve:

s1s2s3s4s5
0.0500.0550.0610.0660.075

(a) What is the forward interest rate that applies from period 3to period 5? That is, what is the value off3,5? Assume annual compounding. (Keep youranswer to 4 decimal places, e.g. 0.1234.)

(b) If the market forward rate from period 3 to period 5 is notequal to the value derived in (a), how can you create an arbitrageopportunity? (No need to key-in here.)

Answer & Explanation Solved by verified expert
3.9 Ratings (384 Votes)
a The arbitragefree forward rate is the rate that would make investing at the 3 year spot rate now and reinvesting the proceeds after 5 years at the forward rate    See Answer
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