final_fall2007_q3_sol - 7.201955 <= Deliver the USD in...

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Question 3 Market Data Months 9 Int. rate divisor 133.3333333 Euro rates bid ask midpoint USD Libor 4.5000 4.6000 4.55 GBP Libor 3 3.1 3.05 Spot Exch Rates bid ask GBP/USD 0.475059382 0.476190476 0.475624929 USD/GBP 2.1000 2.1050 2.1025 Forward Rates bid ask GBP/USD 0.473934 0.476190 0.475062 USD/GBP 2.100000 2.110000 2.105000 Arb Bounds PV (USD 1) convert into GBP invest in GBP Bound 0.966651 0.459216 0.469549 < Fwd ASK (GBP/USD) PV(GBP 1) convert into USD invest in USD Bound 0.977278 2.052284 2.121549 < Fwd ASK (USD/GBP) Summary Bound Actual Rate Bound Test F^b_{USD/GBP} < 2.129704 2.100000 TRUE F^a_{USD/GBP} > 2.121549 2.110000 FALSE F^b_{GBP/USD}< 0.471354 0.473934 FALSE F^a {GBP/USD}> 0 469549 0 476190 TRUE F^a_{GBP/USD}> 0.469549 0.476190 part a Fwd Quotes bid ask Fwd USD/GBP 2.10 2.11 <= 15 <= USD-denominated credit limit (millions) 7 <= GBP-denominated credit limit (millions) Arb Trade: 7 <=Borrow GBP 14.700000 <=Convert into USD at spot USD/GBP bid price 15.196125 <= Invest in eurodollar deposit and receive this in the future
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Unformatted text preview: 7.201955 <= Deliver the USD in the forward market and receive GBP 7.162750 <= Payback the GBP loan, which will cost this much 0.039205 <= GBP-denominated arb profit part b bid ask Fwd Rates (USD/GB 2.150000 2.200000 USD Libor 4.5000 4.6000 GBP Libor 3.0000 3.1000 Months 9 The ask for GBP is too low. ..so the arb trade is to agree to RECEIVE GBP in the forward market Int.rate divisor 133.33 GBP receipt (millions) 50 Fwd Hedge pay GBP 50.000000 rec USD 107.500000 MM Hedge pay GBP 50.000000 <= PAY this amount of GBP borrow GBP 48.863914 <= PV(GBP 80) convert into USD 102.614219 <= USD value of PV(GBP 80) lend USD 106.077449 <= Future value of USD Net future USD receipt, fwd less MM hedg 1.422551 Basis point net benefit of fwd hedge 284.510139 Check: implied USD interest rate at midpoint 3.212168...
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This note was uploaded on 01/20/2012 for the course ECONOMICS 101 taught by Professor Unknown during the Spring '08 term at Carnegie Mellon.

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final_fall2007_q3_sol - 7.201955 <= Deliver the USD in...

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