22 Arbitrage With Forward Rates
About this lesson
This video explains how to construct an arbitrage portfolio when a forward rate is mispriced. It begins by demonstrating how to calculate the fair forward rate using spot rates. When the given forward rate differs from the calculated fair rate, an arbitrage opportunity arises. The video then walks through the specific steps to build a portfolio that capitalizes on this discrepancy, ensuring zero net cash flow at the start and a guaranteed profit. It also touches on how to approach arbitrage if the forward rate is mispriced in the opposite direction. Visit AxiomTutoring.com and subscribe to @AxiomTutoringCourses.
Walkthrough
Follow the reasoning, step by step.
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