Arbitrage Strategies and Cashflows
Table 1.1-1.4 show the arbitrage strategies and cashflows with different K. Table 1.1-1.2 show the arbitrage
strategies with a zero cost at 0 and positive profit at T .
Table 1.1: K = S0 eT +
Strategies
Cashflows
t=0
t=

Question 2 in Slide 62
Question:
Find the PV (at time 0) of 15 payments of $100 each at annual intervals with first payment due in 6 months
using the force of interest as
(t) = 0.06 + 0.002t when 0 t 5,
(t) = 0.07 when t > 5.
Solution: Timeline follows
b