Question 2 a) Explain the difference between future and forward contracts. b) How do swaps...
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Question 2 a) Explain the difference between future and forward contracts. b) How do swaps work and what are the advantages of entering into a swap? Suppose you observe the following three bonds. Assume that all bonds are denominated at $100 face value per contract and that they pay their coupons annually. Bond A Bond B Bond C Price 111.42 108.33 116.61 Coupon 15 15 15 Maturity (years) 3 2 1 i) Compute the spot rates ro,1, 10,2 and 103. ii) Compute the forward rates 11,2 and 12,3. [20 marks]
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