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how are you ? i couldnt find our usual link form last weeks assignment to send this weeks assignment . the format is the same from professor, cut and paste and put formulas in cells etx. i used excel from week before but renamed it. i hope i deloeted everything for you for this week . thanks

Questions: 2, 5, 10 1nd 17 Solutions for Chapters 8 and 9 - MBF Assignments from ESM Chapter 8 Questions: 2, 5, 10, and 17 Problems: 1, 2, 6, 13, and 14. Internet Exercise: None Questions: 1 and 13 Problems: 8 and 11 to 16. Internet Exercise: 4 Assignments from ESM Chapter 9 Chapter 8 Problem 8.1 U.S. Treasury Bill Auction Rates The interest yields on U.S. Treasury securities in early 2009 fell to very low levels as a result of the combined events surrounding the global financial crisis. Calculate the simple and annualized yields for the 3-month and 6month Treasury bills auctioned on March 9, 2009 listed here. Assumptions Treasury bill, face value Price at sale a. Discount on sale 3-Month TBill 6-Month TBill $10,000.00 $9,993.93 $10,000.00 $9,976.74 $6.07 $23.26 Discount on sale is the difference between the face value of the security and the price it is sold at auction. b. Simple yield 0.0607% 0.2331% Simple yield is found by dividing the discount (the dollar return to the investor on maturity) by the price paid on purchase. c. Annualized yield 0.2432% 0.4668% Annualized yield is found by compounding the simple yield by the number of periods per year. In this case a 3-month T-Bill is assumed to have a 90 day maturity within a 360 day interest rate year (U.S. dollar practices). Problem 8.2 Credit Crisis, 2008 The global credit crisis became globally visible in September 2007. Interest rates, particularly the extremely short-term interest rates, will often change quickly (typically up) as indications that markets are under severe stress. The interest rates shown here are for selected dates in September and October 2008. Different publications define the TED Spread different ways, but one measure is the differential between the overnight LIBOR interest rate and the 3month U.S. Treasury bill rate. Overni ght Date USD LIBOR 3Month US Treasur y 9/8/2008 2.15% 1.70% 9/9/2008 2.14% 1.65% 9/10/2008 2.13% 1.65% 9/11/2008 2.14% 1.60% 9/12/2008 2.15% 1.49% 9/15/2008 3.11% 0.83% 9/16/2008 6.44% 0.79% TE D Spr ead 0.45 % 0.49 % 0.48 % 0.54 % 0.66 % 2.27 % 5.65 % Overni ght Date 9/29/2 008 9/30/2 008 10/1/2 008 10/2/2 008 10/3/2 008 10/6/2 008 10/7/2 008 USD LIBOR 3Month US Treasur y 2.57% 0.41% 6.88% 0.89% 3.79% 0.81% 2.68% 0.60% 2.00% 0.48% 2.37% 0.48% 3.94% 0.79% TE D Spr ead 2.16 % 5.98 % 2.98 % 2.08 % 1.52 % 1.89 % 3.15 % 9/17/2008 5.03% 0.04% 9/18/2008 3.84% 0.07% 9/19/2008 3.25% 0.97% 9/22/2008 2.97% 0.85% 9/23/2008 2.95% 0.81% 9/24/2008 2.69% 0.45% 9/25/2008 2.56% 0.72% 9/26/2008 2.31% 0.85% 4.99 % 3.77 % 2.29 % 2.12 % 2.14 % 2.24 % 1.84 % 1.46 % 10/8/2 008 10/9/2 008 10/10/ 2008 10/13/ 2008 10/14/ 2008 10/15/ 2008 10/16/ 2008 10/17/ 2008 5.38% 0.65% 5.09% 0.55% 2.47% 0.18% 2.47% 0.18% 2.18% 0.27% 2.14% 0.20% 1.94% 0.44% 1.67% 0.79% 4.73 % 4.55 % 2.29 % 2.29 % 1.91 % 1.94 % 1.50 % 0.88 % a. Calculate the spread between the two market rates shown here in September and October 2008. The spread between overnight LIBOR and the 3-month U.S. Treasury bill rate are calculated in the two columns above. b. On what date is the spread the narrowest? The widest? The spread is the narrowest on the first date shown, on September 8, 2008, at 0.45%. The widest spread occurs three weeks later on September 30, 2008, at a whopping 5.98%. This is a nearly unhead of spread size, and is still extremely high in the following trading days. It is seen to widen once again to extreme values on October 8th and 9th the following month. c. When the spread widens dramatically, presumably demonstrating some form of financial anxiety or crisis, which of the rates moves the most and why? Although the theoretician would quickly respond -- without looking -- that the overnight LIBOR rate is what should be spiking upwards. This would, according to theory, represent the increased uncertainty over counterparty risk in the interbank market. But looking at the two interest rate series reveals a second cause to the widening of the spread: the dramatic decrease in the 3-month Treasury bill rate. The T-Bill rate was driven to incredible lows on selected dates as a result of U.S. Federal Reserve actions of pumping liquidity into the system in addition to the flight of financial institutions to "quality" as they bid the price of T-Bills up, and with it, yields down. Problem 8.6 CB Solutions Heather O'Reilly, the treasurer of CB Solutions, believes interest rates are going to rise, so she wants to swap her future floating rate interest payments for fixed rates. At present she is paying LIBOR + 2% per annum on $5,000,000 of debt for the next two years, with payments due semiannually. LIBOR is currently 4.00% per annum. Ms. O'Reilly has just made an interest payment today, so the next payment is due six months from today. Ms. O'Reilly finds that she can swap her current floating rate payments for fixed payments of 7.00% per annum. (CB Solution's weighted average cost of capital is 12%, which Ms. O'Reilly calculates to be 6% per six month period, compounded semiannually). a. If LIBOR rises at the rate of 50 basis points per six month period, starting tomorrow, how much does Ms. O'Reilly save or cost her company by making this swap? b. If LIBOR falls at the rate of 25 basis points per six month period, starting tomorrow, how much does Ms. O'Reilly save or cost her company by making this swap? Assumptions Notional principal LIBOR, per annum Spread paid over LIBOR, per annum Swap rate, to pay fixed, per annum Values $ 5,000,000 4.000% 2.000% 7.000% First 6-months Second 6-months Third 6-months Fourth 6-months a. LIBOR increases 50 basis pts/6 months Expected LIBOR 0.500% 4.500% 5.000% 5.500% 6.000% Current loan agreement: Expected LIBOR (for 6 months) -2.250% -2.500% -2.750% -3.000% Interest & Swap Payments Spread (for 6 months) Expected interest payment Swap Agreement: Pay fixed (for 6-months) Receive floating (LIBOR for 6 months) Net interest (loan + swap) -1.000% -3.250% -1.000% -3.500% -1.000% -3.750% -1.000% -4.000% -3.500% -3.500% -3.500% -3.500% 2.250% 2.500% 2.750% 3.000% -4.500% -4.500% -4.500% -4.500% Swap savings? Net interest after swap Loan agreement interest Swap savings (swap cost) $ (225,000) $ (225,000) $ (225,000) $ (225,000) (162,500) $ (62,500) (175,000) $ (50,000) (187,500) $ (37,500) (200,000) $ (25,000) b. LIBOR decreases 25 basis pts/6 months Expected LIBOR -0.250% 3.750% 3.500% 3.250% 3.000% Current loan agreement: Expected LIBOR (for 6 months) Spread (for 6 months) Expected interest payment -1.875% -1.000% -2.875% -1.750% -1.000% -2.750% -1.625% -1.000% -2.625% -1.500% -1.000% -2.500% -3.500% -3.500% -3.500% -3.500% 1.875% 1.750% 1.625% 1.500% -4.500% -4.500% -4.500% -4.500% Swap Agreement: Pay fixed (for 6-months) Receive floating (LIBOR for 6 months) Net interest (loan + swap) Swap savings? Net interest after swap $ $ $ $ Loan agreement interest Swap savings (swap cost) (225,000) (225,000) (225,000) (225,000) (143,750) $ (81,250) (137,500) $ (87,500) (131,250) $ (93,750) (125,000) $ (100,000) In both cases CB Solutions is suffering higher total interest costs as a result of the swap. Problem 8.13 Lluvia and Paraguas Lluvia Manufacturing and Paraguas Products both seek funding at the lowest possible cost. Lluvia would prefer the flexibility of floating rate borrowing, while Paraguas wants the security of fixed rate borrowing. Lluvia is the more credit-worthy company. They face the following rate structure. Lluvia, with the better credit rating, has lower borrowing costs in both types of borrowing. Lluvia wants floating rate debt, so it could borrow at LIBOR+1%. However it could borrow fixed at 8% and swap for floating rate debt. Paraguas wants fixed rate, so it could borrow fixed at 12%. However it could borrow floating at LIBOR+2% and swap for fixed rate debt. What should they do? Assumptions Credit rating Prefers to borrow Fixed-rate cost of borrowing Floating-rate cost of borrowing: LIBOR (value is unimportant) Spread Total floating-rate Comparative Advantage in Borrowing Lluvia's absolute advantage: in fixed rate borrowering Xavier AAA Floating 8.000% Zulu BBB Fixed 12.000% 5.000% 1.000% 6.000% 5.000% 2.000% 7.000% Values 4.000% in floating-rate borrowing Comparative advantage in fixed rate 1.000% 3.000% One Possibility Lluvia borrows fixed Paraguas borrows floating Lluvia pays Paraguas floating (LIBOR) Paraguas pays Lluvia fixed Net interest after swap Xavier -8.000% ---5.000% 8.500% -4.500% Savings (own borrowing versus net swap): If Lluvia borrowed floating If Lluvia borrows fixed & swaps with Paraguas Zulu ---7.000% 5.000% -8.500% -10.500% 6.000% 4.500% 1.500% If Paraguas borrowes fixed If Paraguas borrows floating & swaps with Lluvia 12.000% 10.500% 1.500% The 3.0% comparative advantage enjoyed by Lluvia represents the opportunity set for improvement for both parties. This could be a 1.5% savings for each (as in the example shown) or any other combination which distributes the 3.0% between the two parties. Problem 8.14 Ganado's Cross Currency Swap: SFr for US$ Ganado Corporation entered into a three-year cross currency interest rate swap to receive U.S. dollars and pay Swiss francs. Ganado, however, decided to unwind the swap after one year - thereby having two years left on the settlement costs of unwinding the swap after one year. Repeat the calculations for unwinding, but assume that the following rates now apply: Assumptions Notional principal Original spot exchange rate, SFr./$ $ Values 10,000,000 1.5000 Swap Rates Original: US dollar Original: Swiss franc 3- year bid 5.56% 1.93% 3-year ask 5.59% 2.01% New (1-year later) spot exchange rate, SFr./$ New fixed US dollar interest New fixed Swiss franc interest 1.5560 5.20% 2.20% a. Interest & Swap Payments Year 0 Receive fixed rate dollars at this rate: On a notional principal of: Trident will receive cash flows: $ Ganado will pay cash flows: On a notional principal of: Pay fixed rate Swiss francs at this rate: Settlement: Cash inflow Cash outflow Net cash settlement of unwinding Year 3 5.56% 5.56% 5.56% 10,000,000 $ 556,000 $ 556,000 $ 10,556,000 SFr. 301,500 SFr. 301,500 SFr. 15,301,500 SFr. 15,000,000 b. Unwinding the swap after one-year Remaining Swiss franc cash outflows PV factor at now current fixed SF interest PV of remaining SF cash outflows Cumulative PV of SF cash outflows New current spot rate, SFr./$ Cumulative PF of SF cash outflows in $ Year 2 1.5000 Exchange rate, time of swap (SFr./$) Remaining dollar cash inflows PV factor at now current fixed $ interest PV of remaining dollar cash inflows Cumulative PV of dollar cash infllows Year 1 2.01% 2.01% 2.01% Year 1 Year 2 Year 3 $ 5.20% $ $ 556,000 0.9506 528,517 SFr. 301,500 0.9785 SFr. 295,010 SFr. 14,944,827 1.5560 $ 9,604,645 $ $ 10,556,000 0.9036 9,538,232 10,066,750 2.20% $ $ 10,066,750 (9,604,645) 462,105 This is a cash receipt by Ganado from the swap dealer. SFr. 15,301,500 0.9574 SFr. 14,649,818 Chapter 9 Problem 9.8 Mikhail Khorodovsky's Dilemma Mikhail Khodorkovsky was one of the infamous Russian oligarchs, accumulating billions of dollars in wealth in the mid-1990s with the fall of the Soviet Union. But in 2003 he had been imprisoned by the Russian state for a decade for tax evasion. Upon his release from prison in 2013 he had taken up residence in Switzerland - with most of his money. In November 2014 Mikhail held a portfolio of USD 200 million and CHF 150 million in Swiss banks, in addition to accounts in Russia still holding RUB 1.2 billion. Using the exchange rate table, answer the following: a. What is the value of Mikhail's portfolio as measured in Russian rubles? b. What is the value of Mikhail's portfolio as measured in Swiss francs? c. What is the value of Mikhail's portfolio as measured in U.S. dollars? d. Which currency demonstrated the greatest fluctuations in total value over the six dates? Mikhail's balances by currency: US dollars Swiss francs Russian rubles Exchange Rates (in millions) USD 200 CHF 150 RUB 1,200 Nov 7, 2013 Nov 7, 2014 Dec 4, 2014 Dec 16, 2014 Dec 24, 2014 Jan 16, 2014 Russian rubles per Swiss franc 35.286 48.252 56.249 70.285 55.362 76.639 Russian rubles per US dollar 32.408 46.730 54.416 67.509 54.619 65.071 US dollars per Swiss franc 1.0888 1.0326 1.0337 1.0411 1.0136 1.1778 a. What is the value of Mikhail's portfolio as measured in Russian rubles? Nov 7, 2013 Portfolio Value as Measured in Rubles Nov 7, 2014 Dec 4, 2014 Dec 16, 2014 Dec 24, 2014 Jan 16, 2014 Russian ruble account balance 1,200 1,200 1,200 1,200 1,200 1,200 Swiss franc account balance 5,293 7,238 8,437 10,543 8,304 11,496 U.S. dollar account balance 6,482 9,346 10,883 13,502 10,924 13,014 12,975 17,784 20,521 25,245 20,428 25,710 Total of Three Accounts b. What is the value of Mikhail's portfolio as measured in Swiss francs? Nov 7, 2013 Portfolio Value as Measured in francs Nov 7, 2014 Dec 4, 2014 Dec 16, 2014 Dec 24, 2014 Jan 16, 2014 Russian ruble account balance 34 25 21 17 22 16 Swiss franc account balance 150 150 150 150 150 150 U.S. dollar account balance 184 194 193 192 197 170 Total of Three Accounts 368 369 365 359 369 335 c. What is the value of Mikhail's portfolio as measured in U.S. dollars? Nov 7, 2013 Portfolio Value as Measured in dollars Nov 7, 2014 Dec 4, 2014 Dec 16, 2014 Dec 24, 2014 Jan 16, 2014 Russian ruble account balance 37 26 22 18 22 18 Swiss franc account balance 163 155 155 156 152 177 U.S. dollar account balance 200 200 200 200 200 200 Total of Three Accounts 400 381 377 374 374 395 d. Which currency demonstrated the greatest fluctuations in total value over the six dates? Problems 9.11-9.14 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States Country Australia Japan United States Latest Qtr 4.3% 1.6% 1.9% Gross Domestic Product Forecast Qtr* 2007e 3.8% 4.1% -1.2% 2.0% 3.8% 2.0% Consumer Prices Country Australia Japan United States Year Ago 4.0% 0.9% 2.1% Trade Balance Last 12 mos Country Australia (billion $) -13.0 Latest 2.1% -0.2% 2.8% Forecast 2007e 2.4% 0.0% 2.8% Current Account Last 12 Forecast mos 07 (% of (billion $) GDP) -$47.0 -5.7% Forecast 2008e 3.5% 1.9% 2.2% Industrial Production Recent Qtr 4.6% 4.3% 1.9% Interest Rates 1-yr Govt 3-month Bond Latest Latest 6.90% 6.23% 0.73% 1.65% 4.72% 4.54% Current Units (per US$) Oct 17th 1. Year Ago 1.33 Unemploymen t Rate Latest 4.2% 3.8% 4.7% Japan United States 98.1 $197.5 4.6% -810.7 -$793.2 -5.6% 12 1 17 1.00 119 1.00 Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one-year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts. 11. Current spot rates. What are the current spot exchange rates for the following cross rates? a. Japanese yen/US dollar exchange rate b. Japanese yen/Australian dollar exchange rate c. Australian dollar/US dollar exchange rate = '/$ = /$ / A$/$ = A$/$ 117.00 104.46 1.1200 12. Purchasing power parity forecasts. Assuming purchasing power parity, and assuming that the forecasted change in consumer prices is a good proxy of predicted inflation, forecast the following cross rates: a. Japanese yen/US dollar in 1 year b. Japanese yen/Australian dollar in 1 year c. Australian dollar/US dollar in 1 year = Spot (/$) x (1 + -inflation) / (1 + $-inflation) = Spot (/A$) x (1 + -inflation) / (1 + A$-inflation) = Spot (A$/$) x (1 + A$-inflation) / (1 + $ inflation) 113.81 102.02 1.1156 13. International Fischer forecasts. Asssuming International Fisher applies to the coming year, forecast the following future spot exchange rates using the government bond rates for the respective country currencies: a. Japanese yen/US dollar in 1 year b. Japanese yen/Australian dollar in 1 year c. Australian dollar/US dollar in 1 year = Spot (/$) x (1 + i-) / (1 + i-$) = Spot (/A$) x (1 + i-) / (1 + iA$) = Spot (A$/$) x (1 + i-A$) / (1 + i$) 113.77 99.96 1.1381 14. Implied real interest rates. If the nominal interest rate is the government bond rate, and the current change in consumer prices is used as expected inflation, calculate the implied "real" rates of interest by currency. a. Australian dollar "real" = (1 + nominal) / (1 + A$ consumer price change) - 3.74% rate b. Japanese yen "real" rate c. US dollar "real" rate 1 = (1 + nominal) / (1 + consumer price change) 1 = (1 + nominal) / (1 + $ consumer price change) 1 1.65% 1.69% Problems 9.15-9.16 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States Country Australia Japan United States Latest Qtr 4.3% 1.6% Qtr* 3.8% -1.2% 1.9% 3.8% 4.1% 2.0% Forecast 2008e 3.5% 1.9% Industrial Production Recent Qtr 4.6% 4.3% Unemployme nt Rate Latest 4.2% 3.8% 2.0% 2.2% 1.9% 4.7% Gross Domestic Product Forecast 2007e Consumer Prices Country Australia Japan United States Year Ago 4.0% 0.9% Latest 2.1% -0.2% 2.1% 2.8% Trade Balance Country Australia Japan Forecast 2007e 2.4% 0.0% 2.8% Current Account Interest Rates 1-yr Govt 3-month Bond Latest Latest 6.90% 6.23% 0.73% 1.65% 4.72% 4.54% Current Units (per US$) Last 12 mos (billion $) Last 12 mos (billion $) -13.0 -$47.0 -5.7% 98.1 $197.5 4.6% Forecast 07 (% of GDP) Oct 17th 1. 12 1 17 Year Ago 1.33 119 United States -810.7 -$793.2 -5.6% 1.00 1.00 Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one-year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts. 15. Forward rates. Using the spot rates and three-month interest rates above, calculate the 90-day forward rates for: a. Japanese yen/US dollar exchange rate b. Japanese yen/Australian dollar exchange rate c. Australian dollar/US dollar exchange rate = Spot (/$) x (1 + i 3 month) / (1 + i$ 3 month) 115.85 = Spot (/A$) x (1 + i 3 month) / (1 + iA$ 3 month) = Spot (A$/$) x (1 + A$ 3 month) / (1 + i$ 3 month) 102.88 1.1260 Note: All interest rates need to be adjusted for a 90 day period of a 360 day year for the calculation. 16. Real economic activity and misery. Calculate the country's Misery Index (unemployment + inflation) and then use it like interest differentials to forecast the future spot exchange rate, one year into the future. Australia's Misery Index Japan's Misery Index United States's Misery Index 6.60% 3.80% 7.50% Forecast spot = Spot x ( 1 + Misery-1) / ( 1 + Misery-2) a. Japanese yen/US dollar exchange rate in 1 year Starting Spot Rate Forecast Spot Rate 115.85 111.86 b. Japanese yen/Australian dollar exchange rate in 1 year 102.88 100.18 c. Australian dollar/US dollar exchange rate in 1 year 1.1260 1.1166