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Computing the range of interest rates

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  • All interest rates are annual interest rates
  • All interest rates are continuously compounded (unless specified otherwise).
  • The face value of all bonds is $100, the coupon payments are semiannual (unless specified otherwise).
  • You must keep at least 4 decimals digits while performing your calculations

QUESTION: A bid-ask spot price of a consumption asset is $1000 - $1020 and its bid-ask 7-month forward price is $1040-$1050. Assume there are no storage costs. Assume also you can borrow and invest at the same interest rate. Find the range of interest rates that results in arbitrage opportunity

Reference no: EM133075087

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