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Unformatted text preview: 4.00% Twoyear spot rate 5.50% Threeyear spot rate 6.50% Output area: a. Oneyear forward rate over Year 2 7.02% b. Oneyear forward rate over Year 3 8.53% Chapter 5, Appendix Question 5 Input area: Oneyear forward rate 4.50% Twoyear forward rate 6.00% Output area: Oneyear spot rate 4.50% Twoyear spot rate 5.25% Chapter 5, Appendix Question 6 Output area: Based upon the expectation, hypothe That is, if the expected spot rate for 2 (1 + f 1 ) (1 + f 2 ) = (1 + r 2 ) 2 forward rates. If the spot rate in year If the spot rate in year 2 is lower than eses, strategy 1 and strategy 2 will be in equilibrium at: 2 years is equal to the product of successive oneyear r 2 is higher than implied by f 2 then strategy 1 is best. n implied by f 2 , strategy 1 is best....
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This note was uploaded on 12/14/2010 for the course FINC 311 taught by Professor Stanley,t during the Fall '08 term at Winthrop.
 Fall '08
 Stanley,T
 Finance

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