LR2020-10 Problem FORW-40G It is given that S0 = $10. This is the spot price in dollars of 1 dinar (a foreign currency). rf = 4% p.a. This is the interest rate in dinars. (a continuously-compounded rate using a 365 day year). F(0,T) = $10.30. This is the forward price in dollars for delivery of 1 dinar 200 days from now ("time T). (a) Show how synthetic lending in dollars over 200 days can be obtained. You need to use lending or borrowing in dinars (or alternatively buying or short-selling of dinar- denominated zero-coupon bonds) and one forward contract, long or short. Time-O value ($) (cash outflow) Time-T value ($) Total (b) What is the implied annual interest rate in dollars, expressed as a continuously- compounded rate (using a 365 day year)? (c) Show how synthetic lending in dollars over 200 days can be obtained. You need to use lending or borrowing of 1 dinar (or alternatively buying or short-selling of dinar- denominated zero-coupon bonds worth 1 dinar) and a (long or short) position in forward contracts. Time-0 value ($) (cash outflow) Time-T value ($) Total LR2020-10 Problem FORW-40G It is given that S0 = $10. This is the spot price in dollars of 1 dinar (a foreign currency). rf = 4% p.a. This is the interest rate in dinars. (a continuously-compounded rate using a 365 day year). F(0,T) = $10.30. This is the forward price in dollars for delivery of 1 dinar 200 days from now ("time T). (a) Show how synthetic lending in dollars over 200 days can be obtained. You need to use lending or borrowing in dinars (or alternatively buying or short-selling of dinar- denominated zero-coupon bonds) and one forward contract, long or short. Time-O value ($) (cash outflow) Time-T value ($) Total (b) What is the implied annual interest rate in dollars, expressed as a continuously- compounded rate (using a 365 day year)? (c) Show how synthetic lending in dollars over 200 days can be obtained. You need to use lending or borrowing of 1 dinar (or alternatively buying or short-selling of dinar- denominated zero-coupon bonds worth 1 dinar) and a (long or short) position in forward contracts. Time-0 value ($) (cash outflow) Time-T value ($) Total