CHE374F-PS02 Sol-2009 - ି଼/ଵ� ൅200*ሺ1 ൅ 2.9%� ିଵଵ/ଵ� ൌ 1101.949 Question#2 R ୡୀ 2.5 ൅ 1.32ሺ6 െ 2.5%� ൌ 7.12 Since

CHE374F – PS #2 Solution – 2009 Question #1: Maturity (Months) T-Bill Price Annual Effective Interest Continuous 3 99.75 1.000% 0.995% 6 99.01 2.000% 1.980% 9 98.02 2.700% 2.664% 12 97.09 3.000% 2.956% Assume the risk-free rate for the first three months is flat (i.e. the three month rate is equivalent to the one month or two month rate). a) ݎ ௘௙௙ ൌ 1% T ‐ bill price = 100 * ሺ1 ൅ 1%ሻ ିଵ/ଵଶ = 99.9171 Use linear interpolation: b) ௥ ల ି௥ య ଺ିଷ ൌ ௥ ల ି௥ ఱ.ఱ ଺ିହ.ହ ݎ ௘௙௙ ൌ 1.83% T ‐ bill price = 100 * ሺ1 ൅ 1.83%ሻ ିହ.ହ/ଵଶ = 99.1723 c) ௥ భమ ି௥ వ ଵଶିଽ ൌ ௥ భమ ି௥ భబ ଵଶିଵ଴ ݎ ௘௙௙ ൌ 2.8% T ‐ bill price = 100 * ሺ1 ൅ 2.8%ሻ ିଵ଴/ଵଶ = 97.7250 Maturity (Months) Effective Annual Interest 1 1.00% 4 1.33% 7 2.23% 8 2.47% 11 2.90% Present worth ൌ 1000 * ሺ1 ൅ 1%ሻ ିଵ/ଵଶ ൅400*ሺ1 ൅ 1.33%ሻ ିସ/ଵଶ ൅500*ሺ1 ൅ 2.23%ሻ ି଻/ଵଶ ‐ 1000*ሺ1 ൅ 2.47%ሻ

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Unformatted text preview: ି଼/ଵଶ ൅200*ሺ1 ൅ 2.9%ሻ ିଵଵ/ଵଶ ൌ 1101.949 Question #2: R ୡୀ 2.5% ൅ 1.32ሺ6% െ 2.5%ሻ ൌ 7.12% Since the project is labeled as risky, you would expect a return greater than the 7.12% rate of return expected by the shareholders (market) Question #3: Scenario (1): Invest $1(CAD) at CAD risk ‐ free rate ܨ ൌ 1 כ ݁ ଷ% Scenario (2): Invest $.93(USD) at USD risk ‐ free rate and convert it to CAD at the end of the year F = .ଽଷכ௘ భ.ఱ% ி௑ To avoid arbitrage both investment should have the same value: 1 כ ݁ ଷ% = .ଽଷכ௘ భ.ఱ% ி௑ FX = .916 USD/CAD The proposed bail ‐ out package is going to cost the US government a lot of money and lead to higher inflation in the US, leading to a higher risk ‐ free rate. This would have the effect of weakening the USD and thus the USD/CAD FX rate would increase....
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