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# 008 4929 4864 4886 4887 forward rate 5008 4851 4734

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Unformatted text preview: 0.90796 0.88630 Spot Rate (%) 5.008 4.929 4.864 4.886 4.887 Forward Rate (%) 5.008 4.851 4.734 4.953 4.888 1 1 1 ⇒ fi = 2 = DFi −1 i −1 (1 + f /2) (1 + fi /2) i (1 + ri /2) (a) f1 = 2 DF 0 −1 DF1 =2 1.00000 −1 0.97557 = 0.05008 (b) f2 = 2 DF 1 −1 DF2 =2 0.97557 −1 0.95247 DFi −1 −1 DFi = 0.04851 Fixed Income III: R. J. Hawkins Econ 136: Financial Economics 12/ 24 Rates and Arbitrage Write the FV of the two investment possibilities: A single two-year investment today. FV = (1 + r2 )(1 + r2 ) A one-year investment today followed by a one-year investment in one year’s time. FV = (1 + r1 )(1 + f1 ) Fixed Income III: R. J. Hawkins Econ 136: Financial Economics 14/ 24 Rates and Arbitrage Write the FV of the two investment possibilities: A single two-year investment today. FV = (1 + r2 )(1 + r2 ) A one-year investment today followed by a one-year investment in one year’s time. FV = (1 + r1 )(1 + f1 ) By the Law of one Price the FV of either investment must be equal: (1 + r1 )(1 + f1 )...
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## This note was uploaded on 01/23/2014 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at Berkeley.

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