Problem#1: Suppose that in the fixed-income securities market, the one year and two-year spot interest rates are 8.00% and 9.00%, respectively. That is, Ro, 1 = 8.00% and Re2 = 9.00%.] In addition, the one-year forward rate one year from now [F11] is 10.50%. a) Assuming that Roz and Fui are priced correctly in the market. Then, as per you under the no-arbitrage principle as per you, what should be the one-year spot interest rate? In other words, what should be Rain your BRAIN? [10 points] 1) 6.5% 2) 7.25% 3) 7.5% 4) 8.5% 5) 9.25% 6) 10.0% 7) 8.00% b) What should be the arbitrager's strategy at t=0(15 points) 1) Borrow at one-year spot rate; Borrow at one-year forward rate one-year from now, and Lend at two- year spot rate. 2) Borrow at one-year spot rate; Lend at one-year forward rate one-year from now, and Lend at two-year spot rate. 3) Borrow at one-year spot rate, Lend at one-year forward rate one-year from now, and Borrow at two- year spot rate. 4) Lend at one-year spot rate, Borrow at one-year forward rate one-year from now, and Lend at two-year spot rate. 5) Lend at one-year spot rate: Lend at one-year forward rate one-year from now, and Borrow at two-year spot rate. 6) Lend at one-year spot rate; Lend at one-year forward rate one-year from now, and Lend at two-year spot rate. 7) Lend at one-year spot rate; Borrow at one-year forward rate one-year from now, and Borrow at two- year spot rate. c) Assume that an arbitrager can borrow or lend exactly $100 in the forward interest rate market. She generated an arbitrage strategy such that her net cash flows Now (t=0) and at the end of Year 1 (tel) are equal to zero. However, she generated some positive cash flow at the end of Year 2(2). What is the amount of her net cash flow at the end of Year 2 (t=2)? (15 points) 1) $0.554 2) $1.122 3) $92.317 4) $100 5) SO 6) $0.234 7) S0.754 Problem#1: Suppose that in the fixed-income securities market, the one year and two-year spot interest rates are 8.00% and 9.00%, respectively. That is, Ro, 1 = 8.00% and Re2 = 9.00%.] In addition, the one-year forward rate one year from now [F11] is 10.50%. a) Assuming that Roz and Fui are priced correctly in the market. Then, as per you under the no-arbitrage principle as per you, what should be the one-year spot interest rate? In other words, what should be Rain your BRAIN? [10 points] 1) 6.5% 2) 7.25% 3) 7.5% 4) 8.5% 5) 9.25% 6) 10.0% 7) 8.00% b) What should be the arbitrager's strategy at t=0(15 points) 1) Borrow at one-year spot rate; Borrow at one-year forward rate one-year from now, and Lend at two- year spot rate. 2) Borrow at one-year spot rate; Lend at one-year forward rate one-year from now, and Lend at two-year spot rate. 3) Borrow at one-year spot rate, Lend at one-year forward rate one-year from now, and Borrow at two- year spot rate. 4) Lend at one-year spot rate, Borrow at one-year forward rate one-year from now, and Lend at two-year spot rate. 5) Lend at one-year spot rate: Lend at one-year forward rate one-year from now, and Borrow at two-year spot rate. 6) Lend at one-year spot rate; Lend at one-year forward rate one-year from now, and Lend at two-year spot rate. 7) Lend at one-year spot rate; Borrow at one-year forward rate one-year from now, and Borrow at two- year spot rate. c) Assume that an arbitrager can borrow or lend exactly $100 in the forward interest rate market. She generated an arbitrage strategy such that her net cash flows Now (t=0) and at the end of Year 1 (tel) are equal to zero. However, she generated some positive cash flow at the end of Year 2(2). What is the amount of her net cash flow at the end of Year 2 (t=2)? (15 points) 1) $0.554 2) $1.122 3) $92.317 4) $100 5) SO 6) $0.234 7) S0.754