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Assume that there is a 6-month Treasury bill futures contract in existence. Assume that it is priced to yield 8% (BEY). Assume the face value

Assume that there is a 6-month Treasury bill futures contract in existence. Assume that it is priced to yield 8% (BEY). Assume the face value of the contract is $100,000.

Assume that the 6 month spot rate is 7.4% and the 1 year spot rate is 7.6%

(3 pts) a. Based on the above rates, what should the BEY and PRICE of the 6-month Treasury bill futures contract be?

(12 pts) b. Show that this futures price is incorrect using a zero-cost investment strategy involving the spot market and the futures market in a way that MAKES A PROFIT. (Of course, if the futures price were correct, this zero cost strategy will also have zero profit.) Show all the trades you made at time 0 (including the actual dollar cash flows) and at the expiration of the futures contract.

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