Unformatted text preview: the underlying asset and the cost of borrowing (with foreign exchange as the underlying asset you should note that the underlying asset actually “pays a dividend,” namely the interest rate on foreign bonds). Expectations are irrelevant for forward pricing . 2. (**) This question and the next simply ask you to back out the eurorates from F t = S t (1 + r $ ) Tt (1 + r e ) Tt ; where Tt = 4 / 12, r $ = 1 . 5%, S t = 1 . 40 and F t = 1 . 395. The implied rate was 2.60%. 3. (***) Carrying out the same calculation for the other maturities one can back out the termstructure of interest rates in the eurozone. Time Spot rate 0.33 2.60% 0.58 2.63% 0.83 2.82% 1.08 2.99% 1.33 2.88% Note how our implied term structure is slightly upwardsloping in the eurozone. c ± Diego Garc´ ıa, KenanFlagler Business School Page 1 of 1...
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This note was uploaded on 11/25/2011 for the course BUSI 588 taught by Professor Staff during the Fall '10 term at UNC.
 Fall '10
 Staff
 Derivatives

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