You have a 1-year investment horizon and the following investment alternatives. Today you can buy either a 1-year T-strip, or a 6-month T-strip and when it matures in 6 months, buy another 6-month T-strip. Today, the 6-month T strip yield is 2.20% and the 1-year T-strip yield is 2.80%.  If an "insider" gave you the information that the 6-month forward rate at the end of 6 months from now is 2% (annual), should you invest in the 1-year T strip or the 6-month T strip and then roll over to the next 6-month T strip at the 2% annualized rate?

Calculate the forward rate (make sure you annualize it) and then compare it with the insider's forward rate.

 

Chakrabarty Corp. has a subsidiary in India that expects to send to the US parent company 100,000 USD one year from now. Dr. C, the CFO of Chakrabarty Corp. will use this 100,000 USD to pay bonus to its employees. Not knowing what the the interest rates will be one year from now, Dr. C, wants to lock in a rate one year from now for a period of one year. If the current spot rates are:

• 1-year rate: 5%
• 2-year rate: 7% 
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What is the forward rate Dr. C. can get?