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Let the price of a 1-year zero coupon bond (ZCB) be 598.856 (per $100 face value), that of a 2- year ZCB be 595.324, and

Let the price of a 1-year zero coupon bond (ZCB) be 598.856 (per $100 face value), that of a 2- year ZCB be 595.324, and assume there are investors willing to enter (either as borrowers or lenders] into a 1-year forward rate agreement (FRA) from year 1 to 2 with a fixed rate of 4%. 



Assume there are no market frictions, discrete compounding, and the FRA is settled in arrears, construct an arbitrage strategy?


Calculate its gain (assume face value as notional amount)?

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