Exercise 1. Consider the two period deterministic model having three instruments D01 D02 and D012; a zero coupon bond maturing at t1 a zero coupon bond maturing at t2 and a forward starting zero coupon bond from t1to t2. The non zero cash flows for the bonds are C1 (D01)=1 C2 (D02)=1 C1 (D012)=-D012 and C2 (D012)=1. Given prices X0 (D01)=D01 X0 (D02)=D02 and X0 (D012)=0 find the the value of D012in terms of D01and D02that ensures the model is arbitrage free. (Hint: Find the unique price deflators ?0=1 ?1and ?2.)
Exercise 2.
Exercise 1. Consider the two period deterministic model having three instruments D01 D02 and D012; a zero coupon bond maturing at t1 a zero coupon bond maturing at t2 and a forward starting zero coupon bond from t1to t2. The non zero cash flows for the bonds are C1 (D01)=1 C2 (D02)=1 C1 (D012)=-D012 and C2 (D012)=1. Given prices X0 (D01)=D01 X0 (D02)=D02 and X0 (D012)=0 find the the value of D012in terms of D01and D02that ensures the model is arbitrage free. (Hint: Find the unique price deflators ?0=1 ?1and ?2.)
Exercise 2. Consider the n period model having instruments Rj 0=j

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