Answer:
The arbitrage opportunities are as Buy Eurodollar futures, Borrow Money for 9 months and Invest Money for 6 months.
Explanation:
The future rate of Eurodollar at the end of contract expiring in six months is
[tex]Rate=\frac{100-94}{100}\times 100=6\%[/tex]
This is biannual compounding with actual on 360 days.
Now converting this into the continuous compounding as
[tex]Rate=6\%\times \frac{365}{360}\\Rate=6.083\%[/tex]
The formula for continuous compounding is as
[tex]R_c=mln(1+\frac{Rm}{m})\\R_c=2ln(1+\frac{0.06083}{2})\\R_c=0.0592=5.92\%[/tex]
Now from the formula
[tex]R_F=\frac{R_2T_2-R_1T_1}{T_2-T_1}\\R_F=\frac{5.5\%\times 9-5\%\times6}{9-6}\\R_F=\frac{5.5\%\times 9-5\%\times6}{3}\\R_F=6.5\%[/tex]
As the forward rate is more than both the 6 month and 9 month rate thus
The arbitrage opportunities are as Buy Eurodollar futures, Borrow Money for 9 months and Invest Money for 6 months.
