Question
You will receive $1M one year from now, but will not need to use it until three years from now. You thus need to invest
You will receive $1M one year from now, but will not need to use it until three years from now. You thus need to invest the $1M for two years.
(a) Suppose that you want to guarantee a rate today for your investment. What is the relevant forward rate?
(b) Suppose that the one-year spot rate is 1% and the three-year spot rate is 5%. Compute the forward rate in (a).
(c) Suppose that you are unable to contact a bank that offers forward rates. You can contact, however, a dealer who trades zero-coupon bonds. Explain how you can use zero-coupon bonds to lock in the forward rate in (a).
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