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# 4500.8 - Problem Set 1 Parity Relationships Arbitrage...

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3/1/11 1 Problem Set 1 Parity Relationships & Arbitrage Problem 1 NY LON FRA \$1=£0.60 \$1 = 0.75 £1 = 1.50 \$1,000,000 £ 600,000 900,000 \$1,200,000 Profit = \$200,000

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3/1/11 2 Problem 2 NY LON ZUR \$1=£0.40 \$1=CHF 1.004 £1=CHF 2.008 \$1,000,000 £ 500,000 CHF 1,004,000 \$1,250,000 Profit = \$250,000 Problem 3 FRA today \$1,000,000 769,230. 77 \$1,027,766. 31 784,554. 44 Profit = \$22,822. 69 NY today \$1.30 = 1 \$1.31 = 1 FRA later 4% NY later 1% \$1,004,943. 62 What is not balanced?
3/1/11 3 Problem 4 Real rate in Switzerland: (6% – 1%) / 1.01 = 4.95% Real rate in United States: (2% – 0.5%) / 1.005 = 1.49% Money will flow to the higher real rate, flowing from the U.S. into Switzerland Pressures will be on The U.S. nominal rate to rise The Swiss nominal rate to decline Problem 5 Real rate in Japan: (5% – 1%) / 1.01 = 3.96% Real rate in UK: (10% – 7%) / 1.07 = 2.80% Money will flow to the higher real rate, flowing from the UK into Japan Pressures will be on The UK nominal rate to rise The Japanese nominal rate to decline

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3/1/11 4 Problem 6 Net for RRNB: extra 1% each year This is includes a Floating/Floating Swap RRNB T-Bill + 1% CitiCorp LIBOR + 1% Counterparty T-Bill LIBOR BW Homes T + 2% HSBC Bank LIBOR + 1% \$10,000 per year profit!
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4500.8 - Problem Set 1 Parity Relationships Arbitrage...

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