1. Given the following annual rates:

Term (years)	Rates Euro	Rates Dollars	Rates Peso
6 months	2.50%	3.00%	5.00%
1	3.80%	4.00%	5.50%
2	5.00%	4.20%	6.00%
3	5.20%	6.00%	7.00%
4	5.50%	6.10%	7.50%
5	6.10%	6.50%	8.00%

The exchange rate is $ 20 / dollar, $ 24 / Euro.

Additionally, in the money market there are the following bonds:

Bond	Price	Badge	Bond flow
		Term	6 months	1 years	1.5 years	2 years
BA	103.76	Euro	27.13	27.13	27.13	27.13
BB	107.2	Dollars	4	4	4	104

BC

103.8

Pesos

4

4

4

104

a) Suppose you are told that the 1.5-year spot rate in Pesos can be estimated as the linear interpolation between the 1 and 2-year rates with equal weighting. Show that this rate does not meet the non-arbitrage assumption with the price of bond C and find the 1.5-year spot rate that does.

b) They offer you a "rate insurance" in dollars for a term of 1 year, which begins in 6 months ahead, in which they assure you a rate of 9.3% (this means that they assure you that in 6 months you will have a rate of 9.3% for the term of one year). Please indicate whether you should accept "rate insurance" or not. Justify your answer.