suppose (1) the 1-year spot rate is r1 = 1% (2) the 2-year spot rate is...
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suppose (1) the 1-year spot rate is r1 = 1% (2) the 2-year spot rate is r2 = 2% (3) the 1-year forward rate in year 1 is = 4.5%. In time 0 Assume at time 0 we invest $X in 1-year bond (the 1-year spot rate is r1 = 1%), short $X in 2- year bond (the 2-year spot rate is r2 = 2%), In time 1 we invest $Y at time 1 at the fixed forward rate 4.5%. If this is an arbitrage strategy generating $100 at time t = 1 and nothing otherwise, then what is the X = ? and Y = ? so, need to be something like this -x+x=0 (1+r1)x-(r2)x - y = 100 (1 + r2)^2x+(1 + fr % )y = 0 suppose (1) the 1-year spot rate is r1 = 1% (2) the 2-year spot rate is r2 = 2% (3) the 1-year forward rate in year 1 is = 4.5%. In time 0 Assume at time 0 we invest $X in 1-year bond (the 1-year spot rate is r1 = 1%), short $X in 2- year bond (the 2-year spot rate is r2 = 2%), In time 1 we invest $Y at time 1 at the fixed forward rate 4.5%. If this is an arbitrage strategy generating $100 at time t = 1 and nothing otherwise, then what is the X = ? and Y = ? so, need to be something like this -x+x=0 (1+r1)x-(r2)x - y = 100 (1 + r2)^2x+(1 + fr % )y = 0
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Lets solve the given equations to find the values of X and Y Given 1 The 1year spot rate r1 1 ... View the full answer
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