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:
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 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
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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
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