Quick%20Quiz%205%21 - Buy spot : You get:...

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© Hadi Salehi Esfahani Spot Rate : e = 1.0 €/$ Forward Rate : ef = 1.03€/$ Dollar Interest Rate : i $ = 0.05 Euro Interest Rate : i € = 0.04 You have €10,000 and you need them in dollars next year. You must buy dollars either in the spot market or in the forward market. Which is the strategy with the higher payoff? Quick Quiz 5!
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© Hadi Salehi Esfahani Solution to Quick Quiz 5: Spot Rate : e = 1.00 €/$ Forward Rate : ef = 1.03€/$ Dollar Interest Rate : i $ = 0.05 Euro Interest Rate : i € = 0.04 What is the strategy with the higher payoff? (1 + i $) ef ? (1+ i €) e (1+0.05)(1.03) > (1+0.04)/(1.00) Turn your money into dollars in the spot market!
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Unformatted text preview: Buy spot : You get: [(10,000)/(1.0/$)](1.05) = $10500.00 Hadi Salehi Esfahani Solution to Quick Quiz 5: Spot Rate : e = 1.00 /$ Forward Rate : ef = 1.03/$ Dollar Interest Rate : i $ = 0.05 Euro Interest Rate : i = 0.04 What is the strategy with the higher payoff? If you want the euro to be the home currency, first define Spot Rate : f = 1/ e = 1/(1.00/$) = 1.00$/ Forward Rate : ff = 1/ ef = 1/(1.03/$) = 0.971$/ (1+ i ) ff ? (1 + i $) f (1+0.04)(0.971) < (1+0.05)(1.00) Turn your money into dollars in the spot market!...
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Quick%20Quiz%205%21 - Buy spot : You get:...

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