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Unformatted text preview: Derivative Securities, Fall 2007 Homework 1. Distributed at Lecture 1. Due in class at Lecture 3 (9/18/07 Kohn, 9/19/07 Allen). 1. The present exchange rate between US dollars and Euros is 1.34 $/Euro. The price of a domestic 180day Treasury bill is $97.60 per $100 face value. The price of the analogous Euro instrument is 97.40 Euros per 100 Euro face value. (a) What is the theoretical 180day forward exchange rate? (b) Suppose the 180day forward exchange rate available in the marketplace is 1.34 $/Euro. This is more than the theoretical forward exchange rate, so an arbitrage is possible. Describe a riskfree strategy for making money in this market. How much does it gain, for a contract size of 100 Euro? 2. Let B ( t,T ) be the cost at time t of a riskfree dollar at time T . (a) Suppose B (0 , 1), B (0 , 2) and B (1 , 2) are all known at time 0 (i.e. interest rates are deterministic). Show that the absence of arbitrage requires B (0 , 1) B (1 , 2) = B (0 , 2)....
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 Fall '11
 Bayou
 Finance, Exchange Rate

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