Hello everyone.
I am having some issues with the following questions!! Hopefully you will be able to shed some light on them.
1- Jorgen, CFA, obtains the following quotes for zero coupon government bonds all with a par value of $100.
Type of price: Spot Delivery(years):0 Maturity (years): 3 Price: 95.51
Type of price: Forward Delivery(years):2 Maturity (years): 3 Price: 94.55
Type of price: Spot Delivery(years):0 Maturity (years): 2 Price: 92.45
Jorgen can earn arbitrage profits by:
The correct answer is --> buying the 2-year bond in the spot market, going long the forward contract, and selling the 3-year bond in the spot market.
Explanation: F(2,1)= P3/P2= 98.98 but is quoted at 94.55 and hence is cheap.
How do they reach 98.98? I am confused!! thanks for your help.
2- When yield curve is downward sloping the TED spread is most likely to be: (Libor - T-bill yield)
a)zero
b)Negative
c)Positive - is the right answer.
Souldn’t that be negative?
Many thanks in advance !