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# UGBA01 - Summer 2008 Ismail Ceylan UGBA 103 Discussion...

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Summer 2008 Ismail Ceylan UGBA 103 Discussion Section May 29, 2008 Page 1 of 2 Discussion Section #1 Problem 1: Mr. Baggins has \$1200 available to invest. The spot interest rates for 3-years, 5-years and 7-years are 10%, 7.5% and 5%, respectively. (a) Determine whether or not there are risk free arbitrage opportunities here. (b) Set up an arbitrage table to show how arbitrage proFts could be realized. (c) If the rates in the two markets you are investing in were to remain unchanged, how many round trips would be necessary to double your money? How about to reaching \$1 million starting with \$1200? (d) If the 7-year spot rate were to remain unchanged, to what level would the Fve-year rate have to decrease for the arbitrage opportunity to vanish? (e) Because of very high demand in the 5-year market, the 5-year spot interest rate decreases to 5%. Determine now whether or not there are risk free arbitrage opportunities. Problem 2:

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UGBA01 - Summer 2008 Ismail Ceylan UGBA 103 Discussion...

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