final_fall2007_q4_sol - Question 4 (30 marks, 6 for each...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Question 4 (30 marks, 6 for each part) Rate Volatility CAD/USD 0.909090909 0.05 MXN/USD 9 0.1 Correlation 0.5 6 month 12 month Forward CAD 5.0 5.5 6.0 MXN 6.0 6.5 7.0 USD 4.0 4.5 5.0 6 month 12 month Forward CAD/USD 0.913547237 0.918003512 Forward MXN/USD 9.088235294 9.176899947 CAD Cash Flow CAD 500 MXN Cash Flow MXN 5,000 USD Notional USD 1,106 CAD VaR USD 45.38 MNX VaR USD 91.67 Total VaR USD 120.92 Forward Exchange Rates Exchange Rates Interest Rates Part a: VaR Fee 0.005 Fee in USD 5.527777778 6 months 12 month Dealer pays CAD 500 MXN 5,000 Dealer receives USD 1,089.51 <= use forward exchange rates PV of dealer's pay side USD 1,075.96 PV of dealer's receive side USD 1,068.14 Swap value -USD 7.82 Part b: Swap using forward exchange contracts Part c: Intermediate marking-to-market The market value of the swap is negative from the dealer's perspective. The reason is that they are paying the high interest rate currencies and these currencies DID NOT devalue. Put differently, UIP gives us the "break-even" scenario. ....if the currencies
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

final_fall2007_q4_sol - Question 4 (30 marks, 6 for each...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online