Key: Interest Rate Arbitrage and FRA problems
1) If the current exchange rate for currency X and Y is X3/Y, R X=5%, RY=5%, what is the no-arbitrage one-year
forward rate? If the forward rate is X3.1/Y, what is the potential arbitrage profit based upon eit

Duration problems
Duration = cfw_[P(low r) P(high r)]/P(starting r)/cfw_(high r)-(low r)
For all of our examples
P(starting r)=$1000
Starting r = coupon rate.
Duration examples
Use the +/-0.5% method to compute the duration of each of the following bonds

Portfolio/Duration weights for 2 assets
Given the betas of two stocks are Bx=0.9 and By=1.5, what would be the weights for a portfolio
with a target beta BT =1.2 ?
Wy=(BT-Bx)/(By-Bx) =(1.2-0.9)/(1.5-0.9) = 0.5
Wx= 0.5
1.2=0.5*0.9+0.5*1.5
Given the betas o

TIPS Practice Problems
Given the following TIPS scenarios, compute the entire cash flow received net of outflows. Do not adjust for TVM. In
all cases, the coupon is annual, and the investor purchases at issue for face value=$1000.
EXAMPLE: A two-year TIPS

Examples of Dutch Auctions
See URL: http:/web.streetauthority.com/terms/d/dutch-auction.asp
1) There will be a $15 billion issued in a competitive bid. The bids are as follows:
A: $2 billion at 103
B: $5 billion at 99
C: $6 billion at 102
D: $1 billion at

Practice FRA problems
LIBOR is currently 2.4%. In 3 months a manager needs to borrow $8 million for 183 days, and
she would like to do so at LIBOR To insure against rising interest rates, she buys a 183 FRA with
a rate of 3% which expires in 3 months. Cal