Time 0: borrow at __ options: six month spot rate, six month forward rate, 1 year spot rate, 1 year forward rate +$ ___options: $100000, $97608.59, $95367.43, $97513.20

Buy the ___ options:1 year treasury bill, 1 year futures contract, 6 month treasury bill, 6 month futures contract -$____ options: $100000, $97608.59, $95367.43, $97513.20

Net cash flow $___ options: $0, $97608.59, $95367.43, $97513.20

____(options: buy/sell) the six-month futures contract

At expiration in 6 mo: Pay back the loan plus interest -$____ options: $100000, $97608.59, $95367.43, $97513.20

____(options: buy/sell) the bond we own to fulfill the futures contract +$ ___options: $100000, $97608.59, $95367.43, $97513.20

Net cash flow +$____ options: $0, $97608.59, $95.39, $97513.20

Question 2 10 pts Assume that the following Treasury yield curve is in existence. Time Time in Coupon YTM Periods Rate in Years Price Implied Theoretical Theoretical Semi- Semi- Annual Spot annual Annual Rate forward Spot Rate 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% $95.36743 2.40% 4.80% 4.80000% 6.3514618% Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time 0 and at the expiration of the futures contract. Time 0: Borrow at the Select] +$ [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] the bond we own to fulfill the futures contract +$ [Select] Net cash flow +$ [Select] Question 2 10 pts Assume that the following Treasury yield curve is in existence. Time Time in Coupon YTM Periods Rate in Years Price Implied Theoretical Theoretical Semi- Semi- Annual Spot annual Annual Rate forward Spot Rate 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% $95.36743 2.40% 4.80% 4.80000% 6.3514618% Show that the actual futures price (BEY of 4.9%) is incorrect using a zero-cost investment strategy involving the spot market and the futures market. Of course, if the futures price is correct, this zero cost strategy will also have zero profit.) Show the actual dollar cash flows at time 0 and at the expiration of the futures contract. Time 0: Borrow at the Select] +$ [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] the bond we own to fulfill the futures contract +$ [Select] Net cash flow +$ [Select]