Part 2: Forward Contracts Suppose that it is December 31, 2022 and your friend, Bob, comes to get advice about buying zero-coupon Treasury bonds. His financial advisor, Bill, is a UD graduate, but never took FINC 462. Bill told Bob that he can either buy a 1-year zero coupon bond today (so a bond that matures on December 31, 2023) for $97 or he can enter into a forward contract today to buy a zero-coupon bond maturing on December 31, 2024. The actual purchase date would be in one year (December 31,2023 ) for a price of $96. In the notation of our course, that means that B(0,1,2)=96. 1. Bill does not know what the current price of the 2-year bond (the bond maturing on December 31, 2024) is today. If the Law of One Price holds, what should the bond price be? Hint: Write down what the cash flows are to buying the 2-year bond today. Then, use the 1-year bond and the forward contract to replicate that cash flow, buying x units of the 1-year bond and using z units of the forward contract. 2. If the 2-year bond is actually selling for $92, construct a trading strategy to take advantage of this violation of the Law of One Price. Part 2: Forward Contracts Suppose that it is December 31, 2022 and your friend, Bob, comes to get advice about buying zero-coupon Treasury bonds. His financial advisor, Bill, is a UD graduate, but never took FINC 462. Bill told Bob that he can either buy a 1-year zero coupon bond today (so a bond that matures on December 31, 2023) for $97 or he can enter into a forward contract today to buy a zero-coupon bond maturing on December 31, 2024. The actual purchase date would be in one year (December 31,2023 ) for a price of $96. In the notation of our course, that means that B(0,1,2)=96. 1. Bill does not know what the current price of the 2-year bond (the bond maturing on December 31, 2024) is today. If the Law of One Price holds, what should the bond price be? Hint: Write down what the cash flows are to buying the 2-year bond today. Then, use the 1-year bond and the forward contract to replicate that cash flow, buying x units of the 1-year bond and using z units of the forward contract. 2. If the 2-year bond is actually selling for $92, construct a trading strategy to take advantage of this violation of the Law of One Price