Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

6. Dollar-yen and the carry trade A major currency pair is dollar-yen, quoted in yen per dollar. Suppose the current price is $1 = 82.10.

image text in transcribed

6. Dollar-yen and the carry trade A major currency pair is dollar-yen, quoted in yen per dollar. Suppose the current price is $1 = 82.10. Suppose also that the five-year dollar interest rate is 2.17% and the two- year rate is 0.78% (semi-annual, 30/360 daycount), and that the five-year and two-year yen rates are 0.63% and 0.41% respectively (semi-annual, act/365 daycount). (a) Calculate the forward price for dollar-yen five years forward. For simplicity use a 0.5 accrual factor, rather than 182/365 etc, for yen. (b) Suppose you were unable to trade forward contracts, but were able to trade spot FX and borrow or lend dollar and yen cash. How could you synthetically go long the forward contract in (a)? (c) Suppose you went long one forward contract from (a), and three years from now the FX rate and interest rates are unchanged. What is your profit or loss on the forward? 6. Dollar-yen and the carry trade A major currency pair is dollar-yen, quoted in yen per dollar. Suppose the current price is $1 = 82.10. Suppose also that the five-year dollar interest rate is 2.17% and the two- year rate is 0.78% (semi-annual, 30/360 daycount), and that the five-year and two-year yen rates are 0.63% and 0.41% respectively (semi-annual, act/365 daycount). (a) Calculate the forward price for dollar-yen five years forward. For simplicity use a 0.5 accrual factor, rather than 182/365 etc, for yen. (b) Suppose you were unable to trade forward contracts, but were able to trade spot FX and borrow or lend dollar and yen cash. How could you synthetically go long the forward contract in (a)? (c) Suppose you went long one forward contract from (a), and three years from now the FX rate and interest rates are unchanged. What is your profit or loss on the forward

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Times Guide To Finance For Non Financial Managers

Authors: Jo Haigh

1st Edition

0273756206, 978-0273756200

More Books

Students also viewed these Finance questions

Question

explain what is meant by experiential learning

Answered: 1 week ago

Question

identify the main ways in which you learn

Answered: 1 week ago