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Currently, the 1-year spot interest rate is 10% and 2-year spot interest rate is 15%. Suppose you observe that the 1-year forward interest rate is
Currently, the 1-year spot interest rate is 10% and 2-year spot interest rate is 15%. Suppose you observe that the 1-year forward interest rate is 14%. is there an arbitrage opportunity? If yes, how can you construct a strategy to earn free money? Assume you can lend and borrow at the same rate and ignore transactions costs.
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