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Consider a long forward contract to purchase a coupon-bearing bond whose current price is 650. We will suppose that the forward contract matures in 9
Consider a long forward contract to purchase a coupon-bearing bond whose current price is 650. We will suppose that the forward contract matures in 9 months, and a coupon payment of 28 is expected after 4 months. We suppose that the 4-month and 9-month risk-free interest rates (continuously compounded) are 3% and 4% per annum.
a) Calculate the forward price.
b) Is there an arbitrage opportunity if the forward price is relatively low at 600? List the possible arbitrage actions for:
i) Now.
- In 4 months; and
iii) In 9 months.
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