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Unformatted text preview: e (a). 3 FBE 436
Answers to Problem Set #4 Problem #4.1:
Suppose that the ¥ and Canadian $ spot and forward were quoted as follows:
C$ Forward 30
0.6468 Forward 90
0.6455 Compute forward the premia or discounts for the Canadian $ and the Japanese ¥. What
do you think the 180 forward premia would look like?
The premia are:
C$ 90 day
-0.93% Remember that these are annualized % differences between the spot and the forward rate.
Forward premia tend to be quite similar through the maturity structure. The only way they
would change by much if the slopes of the term structure in the two countries are substantially
different. Problem #4.2:
You have the following information:
iUS(90) = 15%, iUK(90) = 16%, S ($/£) = 2.00, F(90) = 1.995.
Interest rates are 90-day annualized.
d) Where would you invest?
Where would you borrow?
How would you arbitrage?
What is the profit of interest arbitrage per $ borrowed? Note: Do not use approximate formulae.
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This note was uploaded on 01/16/2010 for the course FBE 436 at USC.