Zero rate for n year

Year investment (% per annum)

principal 1,000,000 1 1.60%
pay fixed (Rk) 3.50% 2 2.09%
receive floating (Rf) 3.04% 3 2.40%
R 2.56% 4 2.56%
T2 4 5 2.86%
T1 3

FRA (4,152.27)

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 Forward rate for nth
year (% per annum)

2.58%
3.02%
3.04%
4.06%

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 Face value 100
Coupon 6% 3%
Yield 8%
t c df cdf tcdf
0.5 3 0.96079 2.88237 1.44118 0.25 0.720592
1.0 3 0.92312 2.76935 2.76935 1.00 2.769349
1.5 3 0.88692 2.66076 3.99114 2.25 5.986713
2.0 3 0.85214 2.55643 5.11286 4.00 10.22573
2.5 3 0.81873 2.45619 6.14048 6.25 15.3512
3.0 3 0.78663 2.35988 7.07965 9.00 21.23895
3.5 3 0.75578 2.26735 7.93573 12.25 27.77505
4.0 3 0.72615 2.17845 8.71379 16.00 34.85515
4.5 3 0.69768 2.09303 9.41863 20.25 42.38384
5.0 3 0.67032 2.01096 10.05480 25.00 50.274
5.5 3 0.64404 1.93211 10.62660 30.25 58.44631
6.0 3 0.61878 1.85635 11.13810 36.00 66.82861
6.5 3 0.59452 1.78356 11.59315 42.25 75.35548
7.0 3 0.57121 1.71363 11.99539 49.00 83.96773
7.5 3 0.54881 1.64643 12.34826 56.25 92.61196
8.0 3 0.52729 1.58188 12.65502 64.00 101.2401
8.5 3 0.50662 1.51985 12.91873 72.25 109.8092
9.0 3 0.48675 1.46026 13.14231 81.00 118.2808
9.5 3 0.46767 1.40300 13.32849 90.25 126.6207
10.0 103 0.44933 46.28088 462.80883 100.00 4628.088
85.41272 635.21251 5672.83
7.43698 Duration 66.42

It takes approximately 7.44 years to get PV of cash payments.

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 Convexity

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 1

Fo 3,860.0 r 3%
So 3,860.0 q 4% 1%
T 0.25

3,850.4

Fo > So e(r-q)T Buy the asset and short a forward contract in the asset.

So 100 97.96966 Fo
r 3%
dividend 1 quarterly If Fo is not equal to 97.97, arbritrage
opportunities can be created
PV of dividend
1 0.25 0.99
1 0.50 0.99
1 0.75 0.98 106.00 Price after 1 year
1 1.00 0.97
1 1.25 0.96 3.19 Value of long position
1 1.50 0.96
1 1.75 0.95
1 2.00 0.94
7.74

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 r rf
SGD USD
FX 1.4 1 1.4 SGD
Int 2.5% 3% 1 USD

1.39301747

Arbitrage 1.45 > 1.393017

Interest rates 2.5%

Now Borrow 1000 SGD 1000 Covert to USD
1 year 1025.315

Profit 41.94 SGD

28.93 USD

1.35 < 1.393017

Interest rates 3.0%

Now Borrow 1000 USD 1000 Covert to SGD
1 year 1030.455
Pay 1391.114

Profit 44.32755 SGD

32.83522 USD

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 Action today Action after 3 months
1 Borrow 3,860 1 Receive 38.6
2 Buy the asset 2 Sell the asset 3,860
3 Enter into a forward contract to 3 Repay the loan
sell the asset at 3,860 which is now at 3,889.06

3,898.60
Profit is 9.54

at 3%
0.25 38.60 38.31 3 months
3,821.69
3,860.00 3889.0588

3.93
102.07 Value of long position

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 3.00%
Covert to USD 714.2857
736.039
1067.256

2.5%
Covert to SGD 1400
1435.441
1063.29

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