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Extra Practice 2
Problem 1
¥102,440 $1,000
¥105,513.20$1,005
Profit = 0
$1 = ¥102.44
$1 = ¥104.99¥1 = $0.0095
NYtoday
NYlater
¥105,513.20
TOKtoday
TOKlater
R = 3% R = 0.5%
Problem 2 (Reference: Set 1, #4&5, 10-18 )
• Real rate– Switzerland: (0.25% – 0%)/1.00 = 0.25%– England: (?% – 2%)/1.02 = 0.25%
• Equilibrium nominal rate in England would be 2.2550%
Problem 3 (Reference: Set 1, #7)
$1310 CHF 1152.80
$1320 CHF 1135.20
Equilibrium
NYtoday
$1 = CHF 0.88
$1 = CHF 0.8600
CHF 1 = $ 1.1628
ZURtoday
ZURlater
Spot CHF1152.80Future CHF1135.20
$1320 NYlater
Spot $1310Future $1320
Real return after tax
R (1 – t) – i
1+ir =
3% (1 –.35) – 2%
1.02r =
r = –0.0490%
• Problem 4 (Reference: Set 1, #16-18)
Problem 5 (Reference: Set 1, #1 & 2)
Tokyo
FRA
NYC
€1= ¥ 141.40
¥1 = $0. 0101$1 = ¥98. 98
€0.70 = $1
¥141.40
€1
$1.4286
¥141.40
Equilibrium
Problem 6 (Reference: Set 1, #12 & 13; see #2)
Direct Approach• N = 5• I/YR = 5.06%• P/YR = 1• FV = 1000• PMT = 0• Compute PV• Result: $781.29
2-Step Approach• N = 5• I/YR = 2%• FV = 1000• Compute PV• Result: $905.7308• Input this as FV• I/YR = 3%• Compute PV• Result: $781.29
Problem 7 (Reference: Set 2, #8)
New York
• Find price of a put to sell £61 in exchange for $100 (exchange at the forward rate)
• Answer: * = £2.50/0.59 = $4.24
London• £2.50 buys a call to
exchange $100 for £61 (exchange at the forward rate)
$1 = £0.59 spot
Problem 8 (Reference: Set 1, #21-24)
NYtoday
$1,000,411.04
$1,003,705.40
$1,000,000
$1,000,411.04
Profit = 0
0.5%NY
30 day
2%
1.5%NY
90 day
Problem 9 (Reference: Set 3, #45 & 46)Generic Interest Rate Arbitrage: Different Coupons
C(Example: 5%)
C–x(Example: 4%)
C+x(Example: 6%)
Requires three equally-spaced coupons
Price should be average of the two “bookends”
Price is $70
Price is $85Price is $77.50
Problem 10 (Reference: Set 2, #8 & 9)
• With currency options, a New York call on the Euro is the same as a Frankfurt put on the dollar
• The premia should match when compared at the spot exchange rate– When rendered on the same scale
• Choice C is correct
Problem 11
$9360.34 £5429
$10,000
Profit = 0
NYtoday
$1.00 = £ 0.58
$1.00 = £ 0.61
LONtoday
LONlater
$10,000 NYlater
Price £89Face £100
Price $93.60 Future $100
£6100
£5429
Problem 12 (Reference: Set 3, #45)
Coupon Stripping
• Moving from the 7% coupon to the 6% coupon reduces income by $1 per year, and reduces the price by $5
• Moving from the 6% coupon to the 5% coupon reduces income by $1 per year, and reduces the price by $5
• Moving from the 5% coupon to the 4% coupon reduces income by $1 per year, and reduces the price by $5
• So, reducing the income by $1 per year should reduce the price by $5
• Thus, the price of a zero-coupon bond would be $80 –$20= $60 (so YTM is 7.43%)
Problem 13
FRAtoday
$1,000,000 €720,000
$1,002,468.78 €723,559.41
Profit = 0
NYtoday
$1 = € 0.72
€ 1=$1.3855$1 = €0.7218
FRAlater
1%
NYlater
0.5%
$1,002,468.78
Problem 14 (Reference: Set 1, #7)
$1340 £ 804
$1370 £ 794.60
Equilibrium
NYtoday
$1 = £0.60
$1 = £ 0.5800
£ 1 = $ 1.7241
LONtoday
LONlater
Spot £804Future £794.60
$1370 NYlater
Spot $1340Future $1370
Problem 15 (Reference: Set 1, #8)
CHF 880,000 $ 1,000,000
CHF881,085.60$ 1,015,347.59
Profit = 0
$1 = CHF0.88
$ 1=CHF0.8678CHF1 = $1.1524
NYtoday
NYlater
Spot 1870Future 1880Dividend 1%
CHF881,085.60
ZURtoday
ZURlater
R = 0.25%
Problem 16
$10,800,000 ¥756,000,000 ¥734,400,000Net ¥21,600,000(or $308,571.43)
$10,000,000$ 8,700,000Net $1,300,000(or ¥88,400,000)
$1= ¥ 70.00
$1 = ¥ 68.00
¥ 680,000,000
100,000 bbl
UStoday
TOKtoday
TOKlater
USlater
Oil $ 108.00
Oil $ 87.00
Oil ¥ 7,344
Oil ¥ 6,800
100,000 bbl
100,000 bbl100,000 bbl
Problem 17 (Reference: Set 1, #12 & 13; see #2)
Direct Approach• N = 5• I/YR = 1.4706%• P/YR = 1• PV = –1000• PMT = 0• Compute FV• Result: $1075.7241
2-Step Approach• N = 5• I/YR = 3.5%• PV = –1000• Compute FV• Result: $1187.6863• I/YR = 2%• Compute PV• Result: $1075.7241
Problem 18 (Reference: Set 1, #21-24)
NYtoday
$1,000,328.82
$1,001,480.54
$1,000,000
$1,000,328.82
Profit = 0
0.4%NY
30 days
0.7000%
0.6%NY
90 days
Problem 19 (Reference: Set 1, #12 & 13)
Direct Approach• N = 12• I/YR = 8.15%• P/YR = 1• FV = 1000• PMT = 0• Compute PV• Result: $390.5546
2-Step Approach• N = 12• I/YR = 5%• FV = 1000• PV = 556.8374• Input this as FV• I/YR = 3%• Compute PV• Result: $390.5546
Problem 20 (Reference: Set 3, #51& 52)
$74.6667 €56.00
Profit = 0
NYtoday
$1.00 = € 0.75
$1.00 = € 0.70
FRAtoday
FRAlater
NYlater
Price €80Face €100
Price ?Future $100
$100 €70
€56.00
Problem 21 (Reference: Set 1, #7)
€81,000 $108,000
€78,000 $111,428.5714
Profit =0; U.S. Future = $111.43
$1.00 = €0.75
$1.00 = €0.70
NYtoday
NYlater
Spot $108.00
Future ?
€78,000
RTDtoday
Spot €81.00
Future €78.00
RTDlater
Problem 22 (Reference: Set 1, #7)
CNY658,800 $108,000
CNY656,038.40 $107,000
Profit = 0; U.S. Future = $107.00
Beijingtoday
$1.00 = CNY6.10
$1.00 = CNY6.1312
NYtoday
NYlater
Spot $108Future ?
CNY656,038.40 Beijinglater
Spot CNY658.80
Future CNY656.0384
Problem 23 (Reference: Set 1, #9)
CHF 917,500 $ 1,000,000
CHF 927,508.14$ 1,030,000
Profit = 0
$1 = CHF 0.9175
$1 = CHF 0.9005CHF 1 = $1.1105
NYtoday
NYlater
Spot 1780Future 1815.60Dividend 1%
CHF 927,508.14
ZURtoday
ZURlater
R = 2.2%
Problem 24 (Reference: Set 3, #51& 52)
$77.2325 £48
Profit = 0
NYtoday
$1.00 = £ 0.6215
$1.00 = £ 0.60
LONtoday
LONlater
NYlater
Price £80Face £100
Price ?Future $100
$100 £60
£48
Problem 25 (Reference: Set 1, #3)
FRAtoday
$1,000,000 €745,000
$1,050,143.60 €756,103.39
Profit = $0
NYtoday
$1 = €0.7450
$1 = €0.72FRAlater
3.00%
NYlater
9.9226%
$1,050,143.60
Problem 26 (Reference: Set 1, #7)
£744,000 $1,200,000
£ 727,200 $1,212,000
Profit = 0
LONtoday
$1.00 = £0.62
$1.00 = £0.6000
£1.00 = $1.6667
NYtoday
NYlater
Spot $1200Future $1212
£ 727,200 LONlater
Spot £744Future £727.20
Problem 27 (Reference: Set 1, #3)
INDtoday
$1,000 IDR11,700,000
$1,001.23 IDR11,845,134.43
Profit = $0
NYtoday
$1 = IDR 11,700
$1 = IDR11,830.54
IDR1 = $0.0000845
INDlater
2.5%
NYlater
0.25%
$1,001.23
Problem 28
€ 8,200,000 ¥1,107,000,000 ¥1,100,000,000Net ¥7,000,000(or €51,851.85)
€ 8,030,303.03
€ 8,000,000Net € 30,303.03
(or ¥4,000,000)
€1= ¥ 135.00
€1 = ¥ 132.00
¥ 1,060,000,000
100,000 bbl
ROTtoday
TOKtoday
TOKlater
ROTlater
Oil € 82.00
Oil € 80.00
Oil ¥ 11,000
Oil ¥ 10,600
100,000 bbl
100,000 bbl100,000 bbl
Problem 25
¥ 925,000,000CYN68,181,820CYN70,075,757.58
Net CYN1,893,937.58
(¥ 25 million)
¥921,736,250¥920,000,000
Net ¥1,736,250(CYN 131,037.74)
CYN1=¥13.20
CYN1 = ¥13.25
100,000 bbl
Tokyotoday
Beijingtoday
Beijinglater
Tokyolater
Oil CYN 681.8182
Oil CYN 695.65
Oil ¥9250
Oil ¥9,200
100,000 bbl
100,000 bbl100,000 bbl
Problem 25 (prices in £)
£7,100,000 £6,302,079.69Net £797,920.31
£8,391,608.39
£7,500,000.00
Net £891,608.39
£1= Rp14,281
£1 = Rp14,300
£8,391,608.39
100,000 bbl
Rottoday
Tokyotoday
Tokyolater
Rotlater
Oil 71
Oil £75 Oil £83.9161
Oil £63.0208
100,000 bbl
100,000 bbl100,000 bbl
