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Reading your comment on Student T's answer, it could be possible that your professor is expecting you to come up with the simple fact that, under assumptions of no arbitrage, there is now way to generate a return superior to the risk-free rate without taking any risk. Note that making money is probably not the right terminology, making on average more money ...


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If I understand the question correctly, you're asked to invent a strategy that if under some unrealistic assumptions, your strategy will always earn at a rate higher than the risk-free rate without any risk. This is important because simply buying a risk-free zero-coupon-bond will make money for you, but this is not arbitrage. One of the simplest ...


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Conventional wisdom would have it that the system would be arbitrage free if and only if: All the implied spot and forward rates on each curve are non-negative (I.e implied discount factors are monotonic non-increasing wrt maturity) All the implied spot and forward rates on the 3M curve are greater than or equal to the corresponding rates on the OIS ...


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First, set up the initial position with 0 initial cost: buy 1 PIK bond at face value (1000\$) and sell 1000$ worth of the 2-year zero-coupon to finance the purchase. After one year, you either get paid 0.1 PIK bonds or 100$. In the first case, the position is kept unchanged until maturity at year 2. Your payoff will be the repayment of the PIK bonds (+ ...



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