Question
4. (a) Discuss default risk and illiquidity of forward contracts.(20 marks) (b) You are given the following data: the spot exchange rate is CZK/USD 21;
4. (a) Discuss default risk and illiquidity of forward contracts.(20 marks)
(b) You are given the following data: the spot exchange rate is CZK/USD 21; the p.a. simple interest rate on a three-month deposit is 8 percent in the Czech Republic and 6 percent in the US. Compute:
(i)The time-T USD value of a USDt 1 investment
(ii)The time-t CZK value of a CZKT 1 loan
(iii)The forward rate for a three-month forward contract
(iv)The time-T CZK proceeds from a USDT 1 forward sale, given the forward rate computed in (iii)
(v)The present value of the proceeds in question (iv)
(vi)The time-t CZK value of a USDt 1 spot sale
(vii)The value, in CZKt, of the proceeds of a USDT 1 loan
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Entrepreneurial Finance
Authors: J . chris leach, Ronald w. melicher
4th edition
538478152, 978-0538478151
