Hi, I'm having trouble with this question,
spot rates:
r1 = 7%
r2 = 6%
r3 = 9%
Describe an arbitrage opportunity in each of the following cases
The bank quotes you a 1 year forward rate in 1 year of 4%
1 year forward rate in 1 year
(1.07)(1+f)=(1.06)^2
f=0.05
1) borrow 1 000 at 4%, then 1040 will be owing in year 2
2) lend 1000 at 6% and make 1060
arbitrage profit is $20
is that correct?
Thanks
spot rates:
r1 = 7%
r2 = 6%
r3 = 9%
Describe an arbitrage opportunity in each of the following cases
The bank quotes you a 1 year forward rate in 1 year of 4%
1 year forward rate in 1 year
(1.07)(1+f)=(1.06)^2
f=0.05
1) borrow 1 000 at 4%, then 1040 will be owing in year 2
2) lend 1000 at 6% and make 1060
arbitrage profit is $20
is that correct?
Thanks