3) Forward Rate Arbitrage a) Suppose that there is no forward market and you want lock-in your own forward borrowing rate from the end of year 4 to the end of year 5. You know that y4= 3.1% and ys=3.4%. What is the forward rate you lock-in? Show each step you would take to lock the rate in (at t=0, t4 and t=5). Make sure to show the steps. Don't just calculate the rate. Answer: 4.609% b) Now suppose you are able to obtain an actual forward rate of 4.7% in the forward markets. Show all the steps you would take to do the arbitrage and the profit you would make. Advice: First reproduce the arbitrage spreadsheet I showed in class and then modify it with these numbers. c) Do the same as in part b) but assume the actual rate is 4.5%. 3) Forward Rate Arbitrage a) Suppose that there is no forward market and you want lock-in your own forward borrowing rate from the end of year 4 to the end of year 5. You know that y4= 3.1% and ys=3.4%. What is the forward rate you lock-in? Show each step you would take to lock the rate in (at t=0, t4 and t=5). Make sure to show the steps. Don't just calculate the rate. Answer: 4.609% b) Now suppose you are able to obtain an actual forward rate of 4.7% in the forward markets. Show all the steps you would take to do the arbitrage and the profit you would make. Advice: First reproduce the arbitrage spreadsheet I showed in class and then modify it with these numbers. c) Do the same as in part b) but assume the actual rate is 4.5%