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3. Arbitrage. The following exercise helps to understand arbitrage better. 1 2 3 4 5 Maturity (in years) Spot rate p.a. 2.5% 3.2% 4.1% 3.05%

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3. Arbitrage. The following exercise helps to understand arbitrage better. 1 2 3 4 5 Maturity (in years) Spot rate p.a. 2.5% 3.2% 4.1% 3.05% 2.9% a. Given the above spot rate/zero coupon yield curve (continuously compounded), what is the shape of the yield curve? b. Please explain which spot rate allows you to arbitrage. c. Explain how to arbitrage from this case. 3. Arbitrage. The following exercise helps to understand arbitrage better. 1 2 3 4 5 Maturity (in years) Spot rate p.a. 2.5% 3.2% 4.1% 3.05% 2.9% a. Given the above spot rate/zero coupon yield curve (continuously compounded), what is the shape of the yield curve? b. Please explain which spot rate allows you to arbitrage. c. Explain how to arbitrage from this case

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