{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Quick%20Quiz%205%21

# Quick%20Quiz%205%21 - • Buy spot You...

This preview shows pages 1–3. Sign up to view the full content.

© 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!

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

View Full Document
© 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!
This is the end of the preview. Sign up to access the rest of the document.

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!...
View Full Document

{[ snackBarMessage ]}

### Page1 / 3

Quick%20Quiz%205%21 - • Buy spot You...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online