Economics 393 Problem Set #7 Rules: Please post your answers on Sakai. Answers will be available shortly after the deadline. I. Zero Coupon Yields Here is a Treasury spot yield curve from the Brokertec platform: sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m Maturity (Yrs) Coupon Price YTM 1 3.00 100.2433 2.75 2 3.50 100.1497 2.90 3 3.90 3.20 4 4.20 102.9455 1. What is the yield to maturity of the 04-year bond: (a) 4.99; (b) 7.26; (c) 3.40; (d) 4.50; 2. What is the market price of the 03-year bond: (a) 101.0913; (b) 101.9724; (c) 100; (d) 104.20; 3. What is the zero coupon yield on the 02-year: (a) 2.75; (b) 2.90; (c) 3.21; (d) 7.47; 4. What is the zero coupon yield on the 03-year: (a) 3.21; (b) 2.90; (c) 3.40; (d) 2.75; 5. What is the zero coupon yield on the 04-year: (a) 100.2433; (b) 11.87; (c) 3.20; (d) 3.42; II. Forward and Swap Rates Here is market data for a set of forward prices and interest rates on the Chicago Mercantile Exchange: Maturity Spot t+3 months t+6 months t+9 months t+12 months t+15 months Price Annual Forward Rate 98.7500 1.2500 98.3500 1.6500 98.1500 1.8500 98.0000 2.0000 97.9000 2.1000 97.4000 2.6000 Th 6. What is the swap rate 6 months ahead (t+6): (a) can't be determined; (b) will always be above Treasury spot rates; (c) 1.58; (d) 1.85; 7. What is the swap rate 12 months ahead (t+12): (a) 2.10; (b) 1.85; (c) 1.77; (d) 2.60; III. Foreign Exchange Market 8. Why might we not expect covered interest parity to hold between the U.S. and Vietnam: (a) their forward exchange market is very illiquid; (b) their currency is not freely convertible; (c) there are restrictions on capital ows; (d) all of the above. Suppose that California rice costs $100 a bushel, and Japanese rice costs 20; 000 Yen. 9. What exchange rate would make the rice equally priced in the local currency; (a) 1$/JY; (b) 0.01$/JY; (c) 0.0050$/JY; (d) 100JY/$; 10. If the rice rose to 40; 000 Yen, what nominal exchange rate e would restore the real exchange rate R to the value in the previous question: (a) 0.0025$/JY; (b) 50JY/$; (c) 0.01$/JY; (d) 1$/JY; 11. The Korean Won has fallen nearly 20% over the past year relative to the U S$: If the uncovered interest parity theory were correct, what should Korean interest rates have been https://www.coursehero.com/file/17088577/394-ps7-v6/ 1 sh is ar stu ed d vi y re aC s o ou urc rs e eH w er as o. co m one year ago if rates in the U.S. were 10%: (a) 10%; (b) 20%; (c) 30%; (d) 0; 12. If the USD/GBP exchange rate was 1:6595; the 60 day forward rate was 1:6545; and the 2-month U.S. Treasury bill rate was 4:58%:What is the 2-month yield of British T-bills if covered interest parity holds: (a) 6.39; (b) 4.55; (c) 3.33; (d) 4.58; 13. If the USD/GBP exchange rate was 1:6667; the 90 day forward rate was 1:6938; and the 3-month yield of British T-bills is 3:72%. What is the yield on 3-month U.S. Treasury bills:if covered interest parity holds: (a) 6.39; (b) 10.28; (c) 7.33; (d) 6.38; IV. Foreign exchange derivatives Let S = $0:01=Y en be the spot exchange rate, let the U.S. interest rate rd = 1%, and and let the Japanese interest rate rf = 4%: 14. What is the six-month US$/Yen forward rate F : (a) 110; (b) 100; (c) 101.51; (d) 0.0099; Consider a call option for delivery of 1,000 Japanese Yen expiring in six months with strike price K = 0:01$=Y en and with spot price volatility of 15%: Using the formulas C = exp where rd T [F N (d1 ) KN (d2 )]; ln(F=K) + ( 2 =2)T p ; T and p d2 = d1 T: 15. What is the value of d1 : (a) -0.088; (b) 0.325; (c) -0.243; (d) 0.796; 16. What is the value of d2 : (a) -0.356; (b) -0.112; (c) -0.194; (d) 0.115; Assume that N (d1 ) is 0.4648 and that N (d2 ) is 0.4229. 17. What is the value of the call to buy 1,000 Yen: (a) 0.01; (b) 0.24; (c) 0.14; (d) 0.35; Th d1 = https://www.coursehero.com/file/17088577/394-ps7-v6/ Powered by TCPDF (www.tcpdf.org) 2