Cthe 90 day return in japan is 15793 which represents

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c.The 90-day return in Japan is 1.5793%, which represents a bond-equivalent yield of 1.5793% × 365/90 = 6.405%. The 90-day return in Switzerland is 1.5643%, which represents a bond-equivalent yield of 1.5643% × 365/90 = 6.344%. The estimate for the 90-day risk- free U.S. government money market yield is in this range. 23-10
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Chapter 23 - Futures, Swaps, and Risk Management 4. The investor can buy X amount of pesos at the (indirect) spot exchange rate, and invest the pesos in the Mexican bond market. Then, in one year, the investor will have: X × (1 + r MEX ) pesos These pesos can then be converted back into dollars using the (indirect) forward exchange rate. Interest rate parity asserts that the two holding period returns must be equal, which can be represented by the formula: (1 + r US ) = E 0 × (1 + r MEX ) × (1/ F 0 ) The left side of the equation represents the holding period return for a U.S. dollar- denominated bond. If interest rate parity holds, then this term also corresponds to the U.S. dollar holding period return for the currency-hedged Mexican one-year bond. The right side of the equation is the holding period return, in dollar terms, for a currency-hedged peso-denominated bond. Solving for r US : (1 + r US ) = 9.5000 × (1 + 0.065) × (1/9.8707) (1 + r US ) = 1.0250 r US = 2.50% Thus r US = 2.50%, which is the same as the yield for the one-year U.S. bond. 5. a.From parity: 06453 . 122 0380 . 1 0010 . 1 30 . 124 r 1 r 1 E F 5 . 0 5 . 0 Japan US 0 0 = × = + + × = b. Action Now CF in $ Action at period-end CF in ¥ Borrow $1,000,000 in U.S. $1,000,000 Repay loan ($1,000,000 × 1.035 0.25 ) = $1,008,637.45 Convert borrowed dollars to yen; lend ¥124,300,000 in Japan –$1,000,000 Collect repayment in yen ¥124,300,000 × 1.005 0.25 = ¥124,455,084.52 Sell forward $1,008,637.45 at F 0 = ¥123.2605 0 Unwind forward (1,008,637.45 × ¥123.2605) = ¥124,325,156.40 Total 0 Total ¥129,928.12 The arbitrage profit is: ¥129,928.12 6. a.Delsing should sell stock index futures contracts and buy bond futures contracts. This strategy is justified because buying the bond futures and selling the stock index futures provides the same exposure as buying the bonds and selling the stocks. This strategy assumes high correlation between the bond futures and the bond portfolio, as well as high correlation between the stock index futures and the stock portfolio. 23-11
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Chapter 23 - Futures, Swaps, and Risk Management b. The number of contracts in each case is: i. 5 × $200,000,000 × 0.0001 = $100,000 $100,000/97.85 = 1022 contracts ii. $200,000,000/($1,378 × 250) = 581 contracts 7. Situation A. The market value of the portfolio to be hedged is $20 million. The market value of the bonds controlled by one futures contract is $63,330. If we were to equate the market values of the portfolio and the futures contract, we would sell: $20,000,000/$63,330 = 315.806 contracts However, we must adjust this “naive” hedge for the price volatility of the bond portfolio relative to the futures contract. Price volatilities differ according to both the duration and the yield volatility of the bonds. In this case, the yield volatilities may be assumed equal, because any yield spread between the Treasury portfolio and the Treasury bond underlying the futures contract is likely to be stable. However, the duration of the Treasury portfolio is less than that of the futures contract. Adjusting the naive hedge for
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