Do you see any
potential problems? Why?
3. Suppose that you have a technology that allows you to store money for free (a “mat-
tress”) between years 1.5 and 2. That is, if you put $x under your mattress at t = 1.5,
you will still have $x at t = 2. Construct a long-short trading strategy using the four
bonds that earns you free money today.
Hint: Identify which bond you view as overpriced and start by shorting that bond. Then,
use the other bonds to net out the cash flows.