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Suppose that the six-month rate is 5% and the nine-month rate is 6%. The rate that...

Suppose that the six-month rate is 5% and the nine-month rate is 6%. The rate that can be locked in for the period between six months and nine months using an FRA is 7%. What arbitrage opportunities are open to investors? All rates are continuously compounded.

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ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Arbitrage strategy:
1. Borrow in FRA rate of 7% (Short FRA)

2. Invest the proceeds to get an 8% rate (should be/implied rate). You can do this by being short on the 6-month rate (5%) & being long i.e Invest in 9-month rate (6%).

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