The data are as follows usd interest rate 80 pa gbp

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Unformatted text preview: a . 6 .0 1 % p .a . C h o ic e # 1 : S e ll y e n f o r w a r d ( ¥ 5 0 0 ,0 0 0 ,0 0 0 )/( ¥ 1 8 0 / £ ) = £ 2 ,7 7 7 ,7 7 8 C h o ic e # 2 : M o n e y m a r k e t h e d g e B o r r o w p r e s e n t v a lu e o f ¥ 5 0 0 ,0 0 0 , 0 0 0 ¥ 5 0 0 ,0 0 0 ,0 0 0 / (1 + ( 6 .0 1 /1 0 0 )( 3 0 /3 6 0 )) = ¥ 4 9 7 ,5 0 8 ,3 1 3 T h e p o u n d r e v e n u e is fo u n d b y s e llin g y e n @ s p o t: ¥ 4 9 7 ,5 0 8 ,3 1 3 /(¥ 1 7 9 .5 /£ ) = £ 2 ,7 7 1 ,6 3 4 T o c o m p a re th e tw o , w e n e e d to ta k e th e F V o f th e m m h e d g e £ 2 ,7 7 1 ,6 3 4 * (1 + (2 . 7 /1 0 0 ) (3 0 /3 6 0 )) = £ 2 ,7 7 7 ,7 8 5 T h e m o n e y m a r k e t h e d g e is m o r e e x p e n s iv e ( $ 7 ) 6.5 The Term Structure of Forward Premiums and Discounts •  The term structure of interest rates – descripFon of different spot interest rates for various maturiFes into the future Exhibit 6.5 Yield Curves for Four Currencies 6.5 The Term Structure of Forward Premiums and Discounts •  A review of bond pricing –  Price of a 10- year pure discount bond with a face value of $1,000 is $463.19. What is the spot interest rate for the 10- year maturity expressed in percentage per annum? $463.19[1+i(10)] 10= $1,000 ; solving i=8% –  Yields to maturity – the discount rate that equates the present value of the n coupon payments plus the final principal payment to the current market price A 2- year bond with face value equal to $1,000, an annual coupon of $60 and a market price of $980. If the 1- year spot rate is 5.5%, the 2- year spot rate is found by solving: $980 = ($60/1.055) + ($1060/1+i(2)2) 6.5 The Term Structure of Forward Premiums and Discounts ...
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