Lecture 18:
Purchasing Power Parity II
International Finance
Matthew Peppe
1
Absolute Purchasing Power Parity
Absolute PPP: National baskets of goods have the
same price when expressed in a common
currency
P = S x P*
where P = US Price Index
where P*

Lecture 19:
Currency Futures and Options
International Finance
Matthew Peppe
1
Context: Instruments used in FOREX
markets
Currency
Swaps
1%
Options
and
others
5%
Spot
38%
FX Swaps
44%
From Wiki
Forwards
12%
2
Derivatives
A derivative is an asset whose pa

HW3 Solutions
International Finance
Matthew Peppe
1
Question 1: True or False?
According to the Big Mac Index, if a Big Mac
costs $3.28 in the US and 21.75 krone in
Denmark (equivalent to $4.25 at the spot rate),
the Danish krone is an undervalued curren

Lecture 17:
Purchasing Power (Parity) I
International Finance
Matthew Peppe
1
Review: Carry Trade
What is a carry trade?
The failure of what condition allows carry
trades to be profitable?
How would you implement it?
Is there a rational explanation fo

Lecture 15:
Are UIRP and the UH true?
International Finance
Matthew Peppe
1
Announcements
Midterms will hopefully be graded by Tuesday
Will go over solutions to problems
Remember: final is cumulative
Project
Email me your group members and project topic

Fixed Income Markets
Mark Taranto
BUFN 441
Fixed Income Securities
Text:
Fixed Income Securities, 3rd Edition
by Tuckman & Serrat (John Wiley & Sons, Inc).
Instructor: Mark Taranto, VM 4449
mtaranto@rhsmith.umd.edu
Office Hours:
By appointment
I wi

Midterm Review
Mark Taranto
Fixed Income Securities
Midterm Exam
October 6
You may bring one sheet of paper with notes and formulas
on one side
You will need a hand-held calculator.
You may not use your computer, books, phones or other
notes
You will

Bond Analytics
Fixed Income Securities
Mark Taranto
Bond Analytics
We want to examine the relationship between risk
and reward in the bond market.
The reward will be the yield when we purchase
The risk is that as price will change as yields
change
Bef

Price Yield Relationship
Mark Taranto
BMGT 441
Price-Yield
We have discussed how it is easy to find a
price if you know the yield.
But it is harder to find the yield if you know
the price.
To find the yield of a bond, we just guess at
it. We see how fa

Bond Valuation Problems
Mark Taranto
Fixed Income Securities
Ten Year Auction
Issued on 2/15/2016
Matures on 2/15/2026
Coupon Rate = 1.625%
Yield at Issue = 1.730%
Price at Issue = 99.03961
Yield on 2/24/2016 = 1.735%
Finding the Price of the Ten Year
Pro

Problem 4
Assume that the one year spot rate ( 1 ) is 2.5%
Assume that the one year forward rate ( 1,1 )
starting at year one is 2.8%.
Assume that the one year forward rate ( 2,1 )
starting at year two is 3.0%.
Find the present value of $1000 received in

Fixed Income Markets
Assignment
(Not to be handed in)
Using the Zero Coupon Bond information (first tab) in the Forward Rate Calculator
Excel file, calculate the following:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Find the three year forward rate starting at time 10.
F

Fixed Income Markets - General
02/01/2016
US Governments Securities
Treasury
Agency
Municipal Bond
Corporate Debt
Money Markets
Mortgage Back
Asset Back
Bonds: Basic
Purchaser of the bond lends money to issuer, and issuer promises to
pay
Amount borrowed

Bonds: 30-year debt obligations; Principal plus interest paid at maturity
When yield increases, bond value goes down? Why
Treasury Notes: 2, 5, 10-year debt obligation; Principal plus one period of
Economic Rationale: Suppose you bought a bond at the goin

Interest Rate Derivatives:
Forward Contract is OTC agreement and is a contract between buyer and seller.
Seller delivers a predetermined amount of a good at a predetermined date. No
money changes hands until delivery. Two sided default risk because seller

Making bond portfolios: Constrain risks: Duration and convexity, Default risk, Prepayment risk. Optimize measure of return: Max total return, Max IRR/Yield, Mininize cost | Benefits of diversification
Managing Risks: Exclude all junk bonds, exclude names