What are the reasons for the existence of the eurobond

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Reference no: EM133264681

Question 1: What are the reasons for the existence of the Eurobond market when the foreign bond market already exists?

Question 2: Discuss why we cannot use purchasing power parity (PPP) based trading rule for day-to-day trading in the FX market. Provide an example of a trading rule that is applicable for day-to-day trading.

Question 3: What can you say about the distribution of exchange rate returns and why is an AR(1) model for the exchange rate returns reduced to a random walk model for the log of the exchange rate?

Question 4: The exchange rate between the Australian dollar and the US dollar (S(USD/AUD)) is currently 0.7025-0.7055. A speculator takes a short position on the Australian dollar, and this position is squared two months later when the exchange rate is 0.6555-0.6575. Based on the above information answer the following questions:

i. Calculate the mid-rates when the short position is taken and when it is squared.

ii. Calculate the profit (in points) realised from this operation if the speculator buys and sells at the mid-rates.

iii. Calculate the profit (in points) realised from this operation if the bid-offer spread is taken into account.

iv. Comment on your results by comparing parts ii. and iii. above.

Reference no: EM133264681

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