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3. FX and Rate Differential. Using the same no-arbitrage argument to derive Formula 4.3 iques (a) Provide an expression for the forward exchange rate Fx(0,T)
3. FX and Rate Differential. Using the same no-arbitrage argument to derive Formula 4.3 iques (a) Provide an expression for the forward exchange rate Fx(0,T) for any T using simple (add-on) domestic and foreign interest rates, rdorf (b) Using the Taylor Series approximation (1+x)1+ax, provide an approximate formula for forward exchange rate in terms of spot exchange rate, X(0), and interest rate differential rf - rd. (c) Derive an expression for Fx(0,T) using continuously compounded rd, rf, and use the Taylor Series approximation elle a 1 + x to provide an approximate formula for Fx(0,T) in terms of X(0) and rf - rd. OOL 3. FX and Rate Differential. Using the same no-arbitrage argument to derive Formula 4.3 iques (a) Provide an expression for the forward exchange rate Fx(0,T) for any T using simple (add-on) domestic and foreign interest rates, rdorf (b) Using the Taylor Series approximation (1+x)1+ax, provide an approximate formula for forward exchange rate in terms of spot exchange rate, X(0), and interest rate differential rf - rd. (c) Derive an expression for Fx(0,T) using continuously compounded rd, rf, and use the Taylor Series approximation elle a 1 + x to provide an approximate formula for Fx(0,T) in terms of X(0) and rf - rd. OOL
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