Question 5:

Suppose that discount bond prices are as follows:

a. A customer of your bank wants a forward contract to borrow $20M in three years from now for one year. What would be your quote to the customer?

b. How would you confirm the rate?

c. If customer accepts your offer, how would you lock-in the cash flows. Is there an arbitrage opportunity available? Show the entire cashflows chart.

Suppose that discount bond prices are as follows: t 1 2 3 4 Bt 0.9524 0.8900 0.8278 0.7629 rt (EAR) 0.05 0.06 0.065 0.07