f) Consider two different forward contracts on the same consumption asset. There are no storage costs. Today it is t = 0. One contract has maturity date T₁ and the other has maturity date T₂ where T₂ > T₁. The risk-free rate is r. Show that no arbitrage implies that F₂ ≤ F₁(1+r)²-T₁ [5 marks]
f) Consider two different forward contracts on the same consumption asset. There are no storage costs. Today it is t = 0. One contract has maturity date T₁ and the other has maturity date T₂ where T₂ > T₁. The risk-free rate is r. Show that no arbitrage implies that F₂ ≤ F₁(1+r)²-T₁ [5 marks]
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
![f) Consider two different forward contracts on the same consumption asset. There are no
storage costs. Today it is t = 0. One contract has maturity date T₁ and the other has maturity
date T₂ where T₂ > T₁. The risk-free rate is r. Show that no arbitrage implies that
F₂ ≤ F₁(1+r)²-T₁
[5 marks]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa492e75f-3e6c-410b-a967-6e90e85cedbb%2F00b579e0-a8af-438d-b325-b195c3b5151e%2Fqn3s2y8_processed.png&w=3840&q=75)
Transcribed Image Text:f) Consider two different forward contracts on the same consumption asset. There are no
storage costs. Today it is t = 0. One contract has maturity date T₁ and the other has maturity
date T₂ where T₂ > T₁. The risk-free rate is r. Show that no arbitrage implies that
F₂ ≤ F₁(1+r)²-T₁
[5 marks]
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