Reference no: EM133057561
Sarah plans to purchase a forward contract on 180-day bank bills, to be delivered at the end of 90 days, with face value of $200,000. The current spot rate for 270-day bank bills is 3.26% p.a. (simple interest rate) and the current spot rate for 90-day bank bills is 3.15% p.a. (simple interest rate). Assume that Sarah can borrow or lend at the same rate as the yield rate of the bank bills.
a. Using two carefully labelled cash flow diagrams in your answer, set out the cash flows associated with the forward contract and the replicating portfolio. With reference to these diagrams, explain how you can determine the fair forward rate for this forward contract. Base your answer on the arbitrage pricing principle, and express the fair forward rate as an annual simple rate of interest, to two decimal places.
b. Suppose that the forward rate for a forward contract on 180-day bank bills, to be delivered at the end of 90 days, with face value of $200,000, is 4% p.a. (simple interest rate). List and explain all the steps that Sarah needs to undertake in order to make an arbitrage profit from this forward contract. Make sure you outline all that needs to happen on all relevant dates, as well as today. Round your answer to three decimal places.
c. Suppose that the forward rate for a forward contract on 180-day bank bills, to be delivered at the end of 90 days, with face value of $200,000, is 3% p.a. (simple interest rate). List and explain all the steps that Sarah needs to undertake in order to make an arbitrage profit from this forward contract. Make sure you outline all that needs to happen on all relevant dates, as well as today. Round your answer to three decimal places.
|
Discuss the potential influence of decentralissed finance
: Discuss the potential influence of Decentralissed Finance (DeFi) applications on commercial banks. Relate your response to the purpose for the existence of bank
|
|
What are the idiosyncratic volatilities
: In addition, the expected market risk premium, the market volatility, and the risk-free rate are assumed to be 8%, 20%, and 4%, respectively.
|
|
Calculate interest for each bank
: Melvin has $11,900 to invest. He expects to withdraw the money at the end of 9 years. Calculate interest for each bank
|
|
Current event that demonstrates leader recognizing
: Research a current event that demonstrates a leader recognizing the contributions of his/her employees..
|
|
Labelled cash flow diagrams
: Sarah plans to purchase a forward contract on 180-day bank bills, to be delivered at the end of 90 days, with face value of $200,000.
|
|
What can account for increase in market value
: In any given year, the corporate sector retires more shares (in value terms) than it issues in new stock. Still, the value of the stock market increases over ti
|
|
How the kerckhoff principle affects the design
: (a) For each of the seven (7) security objective, illustrate a scenario of an active attack that attempts to compromise the security objective.
|
|
Should these changes be made
: Management believes that these actions will increase unit sales by 50%. Should these changes be made
|
|
Total value of equity of sindhuh enterprises
: Vishal Noronha needs to prepare a valuation for Sindhuh Enterprises. Noronha has collected the following information for his analysis.
|