For years 2€“5, compute the following:
a. The forward interest rate, rf , for a forward rate agreement that settles at the time borrowing is repaid. That is, if you borrow at t ˆ’ 1 at the 1-year rate Ëœr, and repay the loan at t , the contract payoff in year t is (Ëœr ˆ’ rf )
b. The forward interest rate, re, for a Eurodollar-style forward rate agreement that settles at the time borrowing is initiated. That is, if you borrow at t €“ 1 at the 1-year rate Ëœr, and repay the loan at t , the contract payoff in year
t ˆ’ 1 is (Ëœr ˆ’ re)
c. How is the difference between rf and re affected by volatility (you can compare the two trees) and time to maturity?

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Tree #1 0.08000 0.07676 0.08170 0.07943 0.07552 0.10362 0.10635 0.09953 0.09084 0.13843 0.12473 0.10927 0.15630 0.13143 0.15809 Tree #2 0.08000 0.08 0.08749 0.08261 0.07284 0.09908 0.10689 0.10096 0.08907 0.13060 0.12338 0.10891 0.15078 0.13317 0.16283