fbe436 hw4 solution

995 90 2000 1 016 365 1 01495 or 1495 90

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Unformatted text preview: annualized receipts from the British security are: 365 ⎛ 1.995 ⎛ 90 ⎞ ⎞ ⎜ ⎜ 2.000 ⎜1 + 0.16 365 ⎟ − 1⎟ = 0.1495 or 14.95%. ⎟ 90 ⎝ ⎝ ⎠⎠ This is lower than the U.S.! Therefore we would lend in the U.S. and borrow in the U.K.. If we could do this simultaneously, this type of arbitrage would yield (assuming no transactions . . costs): approximately 1 + 015 4 − 1 + 01496 4 = $0.0001 per $ invested, i.e., 0.01%. This may seem small, but remember it does not involve any net investment of funds; it would be free money! ( ) 4 FBE 436 Answers to Problem Set #4 Problem #4.3: Derive a table similar to the first table below but where all covered yields are computed from the £ sterling point of view. This requires computing appropriate cross spot and forward rates (remember that the £ “year” is 365 days). New York iUS 9.20 London S ($/£) 1.6120 iUK 12.44 F(90) 1.6000 i$C 11.88 Toronto S ($/$C) 0.8384 F(90) 0.8333 Toronto S (£/$C) 0.5202 F(90) 0.5208 Covered Yields (for U.S....
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