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Calculate the fair forward rate for this forward contract

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Question - Sue plans to purchase a forward contract on 90-day bank bills, to be delivered at the end of 90 days, with face value of $100,000. The current spot rate for 180-day bank bills is 2.62% p.a. (simple interest rate) and the current spot rate for 90-day bank bills is 2.75% p.a. (simple interest rate). Assume that Sue can borrow or lend at the same rate as the yield rate of the bank bills.

Use the arbitrage-free pricing principle to calculate the fair forward rate for this forward contract. Base your answer on the arbitrage pricing principle, and express the fair forward rate as an annual simple rate of interest, to four decimal places.

Reference no: EM133066840

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