Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Student name: Student number: Copyright 2020 by Avi Bick Class & section Problem FORW-40G LR2020-10 It is given that S(0) = $10. This is the
Student name: Student number: Copyright 2020 by Avi Bick Class & section Problem FORW-40G LR2020-10 It is given that S(0) = $10. This is the spot price in dollars of 1 dinar (a foreign currency). ry = 4% p.a. This is the interest rate in dinars. (a continuously-compounded rate using a 365 day year). F(0,7) = $10.30. This is the forward price in dollars for delivery of 1 dinar 200 days from now (time T"). (a) Show how synthetic lending in dollars over 200 days can be obtained. You need to use lending or borrowing in dinars (or alternatively buying or short-selling of dinar- denominated zero-coupon bonds) and one forward contract, long or short. Time-O value ($) (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-O value (S) (cash outflow) Time-T value (S) Total Student name: Student number: Copyright 2020 by Avi Bick Class & section Problem FORW-40G LR2020-10 It is given that S(0) = $10. This is the spot price in dollars of 1 dinar (a foreign currency). ry = 4% p.a. This is the interest rate in dinars. (a continuously-compounded rate using a 365 day year). F(0,7) = $10.30. This is the forward price in dollars for delivery of 1 dinar 200 days from now (time T"). (a) Show how synthetic lending in dollars over 200 days can be obtained. You need to use lending or borrowing in dinars (or alternatively buying or short-selling of dinar- denominated zero-coupon bonds) and one forward contract, long or short. Time-O value ($) (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-O value (S) (cash outflow) Time-T value (S) Total
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started