Question

10. Suppose 10 years from now it becomes possible for money managers to engage in time travel. In particular, suppose that a money manager could travel to January 1981, when the 1-year Treasury bill rate was 12.5%.

a. If time travel were costless, what riskless arbitrage strategy could a money manager undertake by traveling back and forth between January 1981 and January 1982.

b. If many money managers undertook this strategy, what would you expect to happen to interest rates in 1981

c. Since interest rates were 12.5% in January 1981, what can you conclude about whether costless time travel will ever be possible?

Answer 1

a. In the case when the travel time is feasible for managers to earn money and the same involves no cost so the managers could able to travel from year to year i.e. 1981 from the 1982 now if we travel back one year so it permited the managers to invested in one year at 12.5% per annuam that generates the interest of 12.5% wihout incurred any type of cost. Also they could come back to the year i.e. 1982 by considering the travel time

b. In the given situation, the rate of interest would declines as of merchanism of the market.

c. As we know that without cost and without risk the travel time could become impossible as it is not impossible to earn 12.5% without incurred any type of cost. Inspite of the travel time possibility, than it would be risky as well as costly that gives the no incentive to the managers who travels back and also earns the interest