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Suppose we have the following current spot rate curve: 6-month spot rate: 5%. 12-month spot rate:...

Suppose we have the following current spot rate curve: 6-month spot rate: 5%. 12-month spot rate: 9%. An investor firmly believes that the 6-month spot rate in 6 months will be 4%, and that you can borrow $4,621 at the current market rates. How much profit can this investor expect to make using the entire borrowed amount if her belief turns out to be true?

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Answer #1

Invest for 1 year..Borrow 4621 for 6 months and then the amount for 6 months

Profit=4621*(1+9%/2)^2-4621*(1+5%/2)*(1+4%/2)=214.992025

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