Global Capital Market-HMW2

Question 4 a from the two spot rate we have the

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Unformatted text preview: correct forward rate in half year: [ ( ( ) ) Because the real forward rate =5.0012% < 5.75%, there’s an arbitrage opportunity. b) The arbitrage strategy is generally as follows: Borrow \$N money for 1 year, at the rate r1=5.5%, then long \$N forward contract at forward rate 5.75% after half year for the second half year. At the first half year, you invest money at rate r0.5=6.0%, and at the second half year, invest at rate 5.75%, then, after one year, the amount of money I have is: ( )( And the interest cost for borrowing money is: ) ( ) So after one year, I can gain \$0.00385625N from nothing, if the N is extremely large, I could gain a large amount of money until the forward rate decrease to 5.0012%. Question 5 1. Assuming the par value of each bond is \$100 ( ) ( ) ( ( ) ) ( ) ) ( ) ( ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Solve the discount factors first: F1 F2 F3 F4 F5 F6 0.98692 0.97143 0.956317 0.940239 0.923021 0.905407 Then, we have the spot rate with different te...
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This document was uploaded on 02/15/2014 for the course CAREY BUSI Global Cap at Johns Hopkins.

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