Assume that interest rate from now to 1 year is 3%, and interest rate from now to 2 year is 3.5%, both yearly compounded. The swap rate of a 2-year Swap contract with 2 swap dates T1 = 1 and T2 = 2 is $87. Also suppose that forward price of the forward contract with length 1 year is $85, and forward price of the forward contract with length 2 years is $90. Find the arbitrage strategy in this case. Clearly state the strategy and show that it is an arbitrage. Please help with this, thanks.
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