1. Suppose we want to buy, at time to, a USD-denominated default-free discount bond, with maturity at t and current price B(to, t). We can do this synthetically using bonds denominated in any other currency, as long as an FX forward exists and the relevant credit risks are the same. First, we buy an appropriate number of, say, euro-denominated bonds with the same maturity, default risk, and the price B(to, t) EUR This requires buying euros against dollars in the spot market at an exchange rate eto. Then, using a forward contract on euro, we sell forward the euros received on December 31, when the bond matures. The forward exchange rate is Fto. The final outcome is that we pay USD now and receive a known amount of USD at maturity. This should generate the same cash flows as a USD-denominated bond under no- arbitrage conditions. Draw the cash flows implied in these operations and the corresponding FX swap. (10 Points)