Trading strategy to take advantage of arbitrage opportunity

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Reference no: EM132026860

A 1 year government bond with no counter-party default risk is trading at 940, and a similar 2 year bond is trading at 905. Both bonds have par value 1,000. A 1 year forward rate agreement for lending between T1 and T2 is being offered at 4%. Today is time t and t < T1 < T2.

Outline a trading strategy to take advantage of this arbitrage opportunity.

Reference no: EM132026860

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