Sarah plans to purchase a forward contract on 180-day bank bills, to be delivered atthe end of 90 days, with face value of $200,000. The current spot rate for 270-daybank bills is 3.26% p.a. (simple interest rate) and the current spot rate for 90-daybank bills is 3.15% p.a. (simple interest rate). Assume that Sarah can borrow orlend at the same rate as the yield rate of the bank bills.

a. Using two carefully labelled cash flow diagrams in your answer,set out the cash flows associated with the forward contract and the replicatingportfolio. With reference to these diagrams, explain how you can determine thefair forward rate for this forward contract. Base your answer on the arbitragepricing principle, and express the fair forward rate as an annual simple rate ofinterest, to two decimal places.

b. Suppose that the forward rate for a forward contract on 180-daybank bills, to be delivered at the end of 90 days, with face value of $200,000, is4% p.a. (simple interest rate). List and explain all the steps that Sarah needsto undertake in order to make an arbitrage profit from this forward contract.Make sure you outline all that needs to happen on all relevant dates, as wellas today. Round your answer to three decimal places.

c. Suppose that the forward rate for a forward contract on 180-daybank bills, to be delivered at the end of 90 days, with face value of $200,000, is3% p.a. (simple interest rate). List and explain all the steps that Sarah needsto undertake in order to make an arbitrage profit from this forward contract.Make sure you outline all that needs to happen on all relevant dates, as wellas today. Round your answer to three decimal places