Suppose that an investor disagrees with market expectations and feels that the forward rate prevailing in the market is higher than what it should be, then the investor can make profit by

Question

Quizplus · Accepted Answer

Buying a bond now and selling it later would be the best choice because if the investor believes that the forward rate is too high, they can buy a bond now at a lower price and sell it later when the market adjusts to their expectations and the bond's value increases. Both options A and B involve selling a bond now, which may not be profitable if the market continues to expect high forward rates. Option C involves buying a bond now at potentially too high of a price if the investor's expectations are correct.

Suppose That an Investor Disagrees with Market Expectations and Feels