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Question:
a) Using illustrative and numerical examples, differentiate between arbitraging and speculation in the context of foreign exchange market.
b) One year borrowing and deposit interest rates are 12% and 10% respectively in the Republic of Tran and 10% and 8.89% respectively in the Kingdom of Sylvania. The spot exchange rate for the Tran dollars is $14 to the Sylvan Francs. The 12-month forward rate is $14.52. The economies are pegged together, and have been so for a number of years.
i) Suggest a way you may profit from the pricing inconsistency that is presented here, consider you have no initial investment funds.
ii) Will the situation persist forever? Describe your answer.
iii) What could be the spot rate which would bring a no-arbitrage situation?
determine the pay \back period for the project.
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Part II The cost of equity (discount rate) can also be determined by using the Capital Asset Pricing Model (CAPM). Calculating the cost of equity using the CAPM model is often mor
a) Calculate the price of a European style call option with 6 months left to maturity assuming a risk-free rate of 3.5% and a non-dividend paying stock which can change in price
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Cavo Corp. has 9 percent coupon bonds making annual payments with a YTM of 8.3 percent. The current yield on these bonds is 8.65 percent. How many years do these bonds have left
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what is rolling budgeting?
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