Arizona State University FIN FIN MISC Suppose that in the fixed-income securities market, the one year, two-year and three-year spot interest rates are 6.00%, 6.25% and 7.00%,…

Arizona State University FIN FIN MISC Suppose that in the fixed-income securities market, the one year, two-year and three-year spot interest rates are 6.00%, 6.25% and 7.00%,…

Suppose that in the fixed-income securities market, the one year,

two-year and three-year spot interest rates are 6.00%, 6.25% and 7.00%, respectively. That is, Ro.1 = 6.00% and Ro.2 = 6.25% and Ro.3 = 7%.) In addition, in the one-year forward interest rate market, the one-year forward rate two-years from now (F2,1) is 8.00% .

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Arizona State University FIN FIN MISC Suppose that in the fixed-income securities market, the one year, two-year and three-year spot interest rates are 6.00%, 6.25% and 7.00%,…
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Assume that an arbitrager can borrow or lend exactly $1,200 in the forward interest market. They generate an arbitrage strategy such that their net cash flows now t=0, at the end of year 1 t=1 and at the end of year 2 t=2 are equal to zero. However they generate some positive cash flows at the end of year 3 t=3. What is the maximum amount of her net cash flow at the end of Year 3 t=3?

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