mt1_fall_2007_sol_q1 - Solutions 1. For each of the...

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Unformatted text preview: Solutions 1. For each of the following statements, indicate whether the statement is true , or false and justify your answer. Unjustified responses will receive a grade of zero . Each question is worth 5 points. (a) You are a swap dealer. You have just signed a swap agreement with a counterparty in which you will pay USD and receive BRL. Statement . The market risks you face are (i) USD devaluation, (ii) declining Brazilian interest rates, and (iii) increasing U.S. interest rates. FALSE. Each of these things is good news for you, so none of them represent a market risk . You are short USD and long BRL, so devaluing USD (which means appreciating BRL) is good news. You are long a BRL bond, which means that declining BRL interest rates are good news. You are short a USD bond, which means that increasing USD interest rates are good news. (b) The bid-ask spread is zero. The JPY/USD spot exchange rate is 115. The USD/EUR spot exchange rate is 1.30. You find a FOREX dealer who will buy or sell JPY for EUR at a rate of JPY/EUR =120....
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This note was uploaded on 01/20/2012 for the course INVESTMENT 101 taught by Professor Unknown during the Spring '08 term at Carnegie Mellon.

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mt1_fall_2007_sol_q1 - Solutions 1. For each of the...

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