Suppose that in the fixed-income securities market, the one-year, two-year, and three-year spot interest rates are 7.000%, 7.250%, and 7.500%, respectively. [That is, R^Mrkt_0,1 = 7.000%, R^Mrkt_0,2 = 7.250% , and R^Mrkt_0,3 = 7.500%.]

As per the no-arbitrage principle, what is the theoretical value of two-year forward interest rate one-year from now? That is, what is the theoretical value of F_1,2 (F^Theo_1,2)? Just to remind you that, all the interest rates in this module are annualized continuously compounded.

A.8.000% B.8.125% C.7.875% D.7.750% E.7.250% F.7.500%