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Given the following information, compute the spot rates, the 1-year forward rate, the par rates, and YTM. (Coupons, if any, are paid once a

 Given the following information, compute the spot rates, the 1-year forward rate, the par rates, and YTM.  (b) Given the following information (the call and put have the same strike price, maturity and underlying 

Given the following information, compute the spot rates, the 1-year forward rate, the par rates, and YTM. (Coupons, if any, are paid once a year). 15 marks Maturity Annual Bond (years) Coupon Price Rate 1 2 0 3% 98 100 Spot Rate (continuous 1-yr Forward Rate compounding) (continuous compounding) Par Rate YTM (annual (annual compounding) compounding) (b) Given the following information (the call and put have the same strike price, maturity and underlying asset): So K T (year) T European call European put $10 $5 1 0% $6 $2 Is there any arbitrage opportunity? If yes, explain how arbitrage can be carried out. 5 marks

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SOLUTION a Spot Rate The spot rate is the current market price of the bond Since the coupon rate is 0 the spot rate is simply the face value of the bond which is 100 1year Forward Rate The 1year forwa... blur-text-image

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