1. a) If the price of a bond with face value $100 is $90, and the...
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1. a) If the price of a bond with face value $100 is $90, and the price of a bond with face value C$100 is C$98, the current exchange rate is 0.8 US Dollars per Canadian Dollar, what is the equilibrium forward price? b) If the Forward price of a Canadian dollar is currently 0.95, how could you use the synthetic to do arbitrage? Hint: Follow these steps: i. What should be the price? ii. Are you buying or selling Canadian dollars in the forward contract? Are you building a synthetic for buying or for selling them? iii. Draw the synthetic that you need, identify each element. iv. Conclude with a strategy: what do you have to do to make arbitrage profits? v. Tell yourself the story with the respective amounts. Assume 100 Canadian dollars as an inflow in t1 since that is the face value of your bond. vi. Verify that you keep profits at maturity equal to the difference in prices in step i. 1. a) If the price of a bond with face value $100 is $90, and the price of a bond with face value C$100 is C$98, the current exchange rate is 0.8 US Dollars per Canadian Dollar, what is the equilibrium forward price? b) If the Forward price of a Canadian dollar is currently 0.95, how could you use the synthetic to do arbitrage? Hint: Follow these steps: i. What should be the price? ii. Are you buying or selling Canadian dollars in the forward contract? Are you building a synthetic for buying or for selling them? iii. Draw the synthetic that you need, identify each element. iv. Conclude with a strategy: what do you have to do to make arbitrage profits? v. Tell yourself the story with the respective amounts. Assume 100 Canadian dollars as an inflow in t1 since that is the face value of your bond. vi. Verify that you keep profits at maturity equal to the difference in prices in step i.
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Answer Solution Interest Rate in US Face ValuePrice of US BondPrice of US Bond 1009090 01111 In... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim
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