Question 1. (9 marks)
Suppose that the 90-day bank bill rate is 3% p.a., the 180-day rate is 3.75% p.a. and Australian
90-day bank bill futures maturing in 90-days are quoted at 95.20.
(a) Show that there is an arbitrage opportunity.
(b) By constructing the appropriate arbitrage portfolio, determine the profit per $100, 000
face value of the 90-day bank bill.
(c) Given that the bank bill rates are correct, what should the bank bill futures quote be?