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1. (a) (i) Boris is a British investor who wants to sell 40 Billion EURGBP in one year's time. The EURGBP spot rate is 0.85,
1. (a) (i) Boris is a British investor who wants to sell 40 Billion EURGBP in one year's time. The EURGBP spot rate is 0.85, the EUR interest rate is 0.00% and the GBP interest rate is 0.75%. Economists estimate that GBP will weaken by 10% within one year. Using covered interest rate arbitrage, calculate the value of the one year forward on EURGBP and determine how much GBP Boris will deliver. (ii) Suppose the European Central Bank decides to ban short-selling of EUR by British investors from the start of 2021. What effect will this have on the value of the one year forward on EURGBP and what will Boris have to do in order to deliver GBP in one year's time? (b) Consider the oil futures market where each contract is for one barrel of oil. The oil is physically delivered to holders of the contract on the expiration date. Suppose the April oil futures contract expires tomorrow and the May oil futures contract expires 30 days later. The price today for the April contract has turned negative and is trading at -$38 while the price for the May contract is +$22. Using an arbitrage argument, derive the average storage cost per day for storing a barrel of oil until the May expiration. You may assume interest rates are zero and there are no other costs associated with holding oil. (c) In a one-period model, the asset S moves up to SU with a risk-neutral proba- bility p or down to S/U with probability 1 - p. Construct a formula for U in terms of p and use this formula to explain why p
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