What is the arbitrage strategy to exploit the opportunity

Assignment Help Financial Management

Reference no: EM131459584

Current bond price is $1000 and coupon payments will be made $60 every 6 months. Risk-free zero rates are 9% and 9.5% for 6 months and 1 year, respectively, with continuous compounding.

1) Given this information, what should be forward price for no arbitrage opportunity?

2) If the one-year forward price is $980, does arbitrage opportunity exist? If so, what is the arbitrage strategy to exploit the opportunity and how much is the arbitrage profit?

For full points, please write in details. Details include

show how you derived the forward price with no arbitrage opportunity

and with respect to arbitrage strategy

show how much you would borrow or lend NOW in detail (for how long and at what interest rate), whether you would SHORT / LONG an underlying asset or forward contract now, etc

And how does the cash flows occur in each period (6 months? 1 year?)? Provide a CashFlow timetable with the net cash flow effect as well.

Reference no: EM131459584

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