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Calculate the zero rate for one year

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Principal=100, Time to maturity (in years)=1, Annual coupon ($)=0, Price ($)=96, Additionally, assume that the zero rate for two years is 4.85% with continuous compounding.

a) Calculate the zero rate (with continuous compounding) for one year.

b) What is the equivalent one-year zero rate with monthly compounding?

c) What is the forward rate (with continuous compounding) for the period between one and two years?

d) The rate that can be locked in between year 1 and year 2 with a Forward Rate Agreement (FRA) is 6.5% (with continuous compounding). Is there an arbitrage opportunity? If yes, please explain (without calculations) how you can earn a risk-free profit.

Reference no: EM132611756

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