Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. (Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time 0 and at the expiration of the futures contract.

Time 0: Borrow at the ____ a)6-month spot rate b) 6-month forward rate c)1-year spot rate d) 1-year forward rate

+$ ______ a) $100000 b) $97608.59 c) $95,367.43 d) $97,513.20

Buy the _____ a) 1-year treasury bill b) 1-year futures contract c) 6-month treasury bill d) 6-month futures contract

-$ ______ a) $100000 b) $97608.59 c) $95,367.43 d) $97,513.20

Net cash flow $ ____ a) $0 b) $97608.59 c) $95,367.43 d) $97,513.20

____ a)buy b) sell the six-month futures contract

At expiration in 6 mo: Pay back the loan plus interest -$ _____ a) $100000 b) $97608.59 c) $95,367.43 d) $97,513.20

_____ a)buy b) sell the bond we own to fulfill the futures contract

+$ ______ a) $100000 b) $97608.59 c) $95,367.43 d) $97,513.20

Net cash flow +$ _______ a) $0 b) $97608.59 c) $95.39 d) $97,513.20

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Assume that the following Treasury yield curve is in existence. Time in Years Time in Coupon YTM Price Periods Rate Theoretical Semi- Annual Spot Rate Implied Theoretical Semi- Annual Spot annual Rate forward rate Implied Annual Forward Rates 0.5 1 0.00% 4.50% $97.79951 2.25% 4.50% 2.55022% 5.1004401% 1 2 0.00% 4.80% $95.36743 2.40% 4.80% 4.80000% 6.3514618% Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time and at the expiration of the futures contract. Time 0: Borrow at the [Select] +$ [Select ] Buy the [Select ] Select ] Net cash flow $ Select ] Select] the six-month futures contract At expiration in 6 mo: Pay back the loan plus interest - [Select] [ Select] V the bond we own to fulfill the futures contract +$ [Select] Net cash flow +$ [Select) Assume that the following Treasury yield curve is in existence. Time in Years Time in Coupon YTM Price Periods Rate Theoretical Semi- Annual Spot Rate Implied Theoretical Semi- Annual Spot annual Rate forward rate Implied Annual Forward Rates 0.5 1 0.00% 4.50% $97.79951 2.25% 4.50% 2.55022% 5.1004401% 1 2 0.00% 4.80% $95.36743 2.40% 4.80% 4.80000% 6.3514618% Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time and at the expiration of the futures contract. Time 0: Borrow at the [Select] +$ [Select ] Buy the [Select ] Select ] Net cash flow $ Select ] Select] the six-month futures contract At expiration in 6 mo: Pay back the loan plus interest - [Select] [ Select] V the bond we own to fulfill the futures contract +$ [Select] Net cash flow +$ [Select)