Consider the following spot rate curve:
| s1 | s2 | s3 | s4 | s5 |
| 0.050 | 0.055 | 0.061 | 0.066 | 0.075 |
(a) What is the forward interest rate that applies from period 3to period 5? That is, what is the value off3,5? Assume annual compounding. (Keep youranswer to 4 decimal places, e.g. 0.1234.)
(b) If the market forward rate from period 3 to period 5 is notequal to the value derived in (a), how can you create an arbitrageopportunity? (No need to key-in here.)
