1.). Suppose you are given the following risk-free spot rates for zero bonds maturing in 1,2, 3, 4 years, respectively : R1 = 0:05, R2 = 0:055, R3 = 0:0574, R4 = 0:06. Find the annualized two period forward rate beginning at period 2.

2.) I wish to borrow money at the beginning of the second time period (i.e, next year). The two year borrowing rate is 0.65 and the one year investing rate is 0.05. Explain the strategy for locking in the one-period rate for next year. Include all relevant calculations. A) what do I do now (time 0)

B) what do I do at the beginning of time period 2?

C) what happens at the end of time period 2.

3)You are short Euros 1 million in currency risk in your investments. The price of the foreign currency is Euro 1 = $1:40. You wish to hedge with futures.

a. Do you go long or short in the the futures market?

b. If the domestic interest rate is 4% and the foreign interest rate is 5%, what is the futures price on a one year contract.

c. If I use options to reduce currency risk, do I use a put or call ? d. Do I go long or short?

4) Consider an investment in the Royal Bank of Canada (RBC). Denote the Canadian dollar by C$: Suppose C$1 = $1:05 and suppose RBC stock price is C$25. Thus e0 = 1:05 and p0 = 25: After one year, the local stock price has appreciated to C$28 and the currency has value C$1 = $0:90.

a. What is the price of the $ after one year?

b. What is the local return on on the Royal Bank of Canada stock? c. What is the return on the Canadian currency, C$. d. What is the total $ return on an invest ment in the Royal Bank of Canada Stock?