Alan is planning to purchase a forward contract on 90-day bank bills, to be delivered at the end of 180 days, with face value of $500,000. The current spot rate for 180-day bank bills is 3.97% p.a. (simple interest rate) and the current spot rate for 270-day bank bills is 4.15% p.a. (simple interest rate). Assume that Bella can borrow or lend at the same rate as the yield rate of the bank bills.

By using two carefully labelled cash flow diagrams in your answer setting out the cash flows associated with the forward contract and the replicating portfolio, explain how you can determine the fair forward rate for this forward contract. Base your answer on the arbitrage pricing principle, and express the fair forward rate at an annual simple rate of interest, to 2 decimal places