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Today is January 1. Forward prices for contracts maturing in one year and two year trade at 106 and 109 respectively. The simple interest rate
Today is January 1. Forward prices for contracts maturing in one year and two year trade at 106 and 109 respectively. The simple interest rate per year is 5% and remains constant forever. ( Indeed the yield curve is flat at 5% simple per year). The underlying security involves no holding costs, and pays no dividends. Assume the current spot price is 100 dollars today. (a) Demonstrate a way of generating arbitrage free profits over one year. (b) Generate a way of generating arbitrage free profits over two years. (c) If we were not given the spot price at date 0, but were given the two forward prices, can a strategy be created that leads to riskless arbitrage
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