6. There are six half-year periods on a forward curve. The curve is currently at at 6%, and you are given the following declining volatility curve:

0:06

0:05

0:04

0:03

0:02

0:01

(a) What feature of interest rates might result in the volatility curve declining so sharply?

(b) Solve for the two forward curves a half-year ahead, and plot each of them. What e ect does the declining volatility have on the two curves in the next period?