A bank can borrow or lend at LIBOR. Suppose the 6 month rate is 6% and the 9 month rate is 7%. The rate that can be locked in for the period between 6 and 9 months using an FRA is 10%. All rates are stated as APRs and compounded quarterly. Is there an arbitrage opportunity and how do you take advantage of it? [Note, a good answer to slide 9 would be to calculate the forward rate of 7.8%, identify that the forward rate>FRA, and then say something along the lines of "You could borrow the money at 6.5% and then lend it at 7.8%. To borrow at 6.5% go long in the FRA and then borrow at the spot rate for 3 months in 6 months. To lend at 7.8% borrow for 6 months at 5% and invest the money for 9 months at 6%."]. A bank can borrow or lend at LIBOR. Suppose the 6 month rate is 6% and the 9 month rate is 7%. The rate that can be locked in for the period between 6 and 9 months using an FRA is 10%. All rates are stated as APRs and compounded quarterly. Is there an arbitrage opportunity and how do you take advantage of it? [Note, a good answer to slide 9 would be to calculate the forward rate of 7.8%, identify that the forward rate>FRA, and then say something along the lines of "You could borrow the money at 6.5% and then lend it at 7.8%. To borrow at 6.5% go long in the FRA and then borrow at the spot rate for 3 months in 6 months. To lend at 7.8% borrow for 6 months at 5% and invest the money for 9 months at 6%."]