H1 - there are risk free arbitrage opportunities here Give...

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S CHOOL OF B USINESS A DMINISTRATION U NIVERSITY OF C ALIFORNIA AT R IVERSIDE B US 106 A VINASH V ERMA H OMEWORK 1 D UE A PRIL 6, 2011 1. Ms. Juanita Fotheringay- Murgatroyd has $900,000 available to invest. The discount factor for four years is 0.891, while the discount factor for seven years is 0.8919. (i). Work out r 4 , the interest rate on risk free investments with a term to maturity of four years. (ii). Work out r 7 , the interest rate on risk free investments with a term to maturity of seven years. (iii). Determine whether or not
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Unformatted text preview: there are risk free arbitrage opportunities here. Give reasons. (iv). Set up an arbitrage table to show how arbitrage profits could be realized. (v). If the rates in the two markets were to remain unchanged, how many round trips would be necessary to reach $90 million starting with $900,000? (vi). If the four-year rate were to remain unchanged, to what level would the seven-year rate have to rise for the arbitrage opportunity to vanish?...
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