Week 10 discussion - Binal Khetani FIN 535 Chapter 20 Q-12...

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Binal Khetani FIN 535 Chapter 20 Q-12 E f = (1 + r f )/ (1 + i f ) – 1 = (1 + 0.7) / (1 + .09) – 1 = (1.7)/ (1.09) – 1 = 55.96% E f = 55.96 % Q-15 Possible Degree of Fluctuation on Yen Against the Dollar Percentage Probability Effective Financing Rate -4.00% 20.00% (1.08)[1+(-4%)]-1 = 3.68% -1.00% 30.00% (1.08)[1+(-1%)]-1 = 6.92% 0.00% 10.00% (1.08)[1+(0%)]-1 = 8% 3.00% 40.00% (1.08)[1+(3%)]-1 =11.24%
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Q-17 Currency Possible % change in the Spot Rate Over the Loan Life Probability of That % change in the Spot Rate Occurring Effective Financing Rate Canadian Dollar 4.00% 70.00% (1.09)[1+(4%)]-1 = 1.1336-1 = 13.36% Canadian Dollar 7.00% 30.00% (1.09)[1+(7%)]-1 = 1.1663-1 = 16.63% Japanese Yen 6.00% 50.00% (1.07)[1+(6%)]-1 = 1.1342-1 = 13.42% Japanese Yen 9.00% 50.00% (1.07)[1+(9%)]-1 = 1.1663-1 = 16.63% Effective Financing Rate of the Portfolio Canadian Dollar 70%(13.36%) + 30%(16.63%) = 14.34% Japanese Yen 50%(13.42%) + 50%(16.63%) = 15.02% Possible Joint Effective Financing Rates Joint Probability Effective Financing Rate Canadian Dollar Japanese Yen 13.36 13.42 (70%)(50%) = 35% 0.4(13.36) +0.6(13.42) = 13.4% 13.36 16.63 (70%)(50%) = 35% 0 .4(13.36) + 0.6(16.63)
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