Question 7

Assuming that the forward rate between year 1 and year 3, f0 (1, 3), is 5%,and the forward rate between, year 3 and year 4, f0 (3, 4), is 6%. The current four-year zero rate is, R(0, 4), is 5%.What is the current one-year zero rate R(0, 1) ? (assume all rates are for continuous compounding)

a) 2 %

b) 3 %

c) 4 %

d) 5 %

e) 6 %

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Question 8

A portfolio P has dollar duration of -$415. How many units of the hedging instrument, H, do you need to add to P to make it duration-neutral? The dollar duration of H is -$205.

a) Long 2 units of H.

b) Short 2 units of H.

c) Long 0.5 units of H.

d) Short 0.5 units of H.