Describe the relation between the yield curve of spot rates and the yield curve of forward...

Describe the relation between the yield curve of spot rates and the yield curve of forward rates. Besides providing the basic relation (increasing, decreasing, independent), please provide the economic reasoning. You are greatly encouraged to provide any graphical representation that might help convey the idea. Maximum 200 words. Please write as clear as possible.

Expert Solution

jeff jeffy answered 4 months ago

Why must the relationship between spot rates and forward rates hold? A) Because there is an...

Why must the relationship between spot rates and forward rates hold? A) Because there is an assumption of arbitrage-free valuation in the market. B) Because we need a reliable yield curve to price fixed-income securities C) Because investors require multiple methodologies to invest their savings D) Because the law of one price does not hold in all situations

Suppose that the spot and the forward exchange rates between the UK pound (£) and the...

Suppose that the spot and the forward exchange rates between the UK pound (£) and the Euro (€) are S0=0.5108 £/€ and Ft=3 months=0.5168 £/€. The time to maturity of the forward contract is 3 months. The annual interest rate of £-denominated Eurocurrency market deposits is 4.08%. The annual interest rate of €-denominated, 3-month Eurocurrency market deposits is 3.15%. a) Examine whether there exists an arbitrage opportunity. b) Devise an arbitrage strategy. Describe the transactions and calculate the arbitrage profits.

If you expect the yield curve to invert next year, with spot rates for maturities of...

If you expect the yield curve to invert next year, with spot rates for maturities of 10-years and above falling and spot rates for maturities less than 10-years rising. Given your forecast, explain which of bond Bond A or Bond B you would recommend for a long position over the upcoming year: Bond A -discount bond with a duration of 12-years and YTM of 5%; Bond B -coupon rate of 10%, a duration of 12-years, and a YTM of 5%.

1. Given the benchmark annual Par Curve shown below, calculate the spot and forward rates for...

1. Given the benchmark annual Par Curve shown below, calculate the spot and forward rates for each period. Maturity. Maturity Par Rate 1 3% 2 4% 3 5% a. Calculate the spot and forward rates for each period. b. Calculate the 1-year forward rates for each period. c. Use the forward rates calculated above to value a 3-year 1% annual coupon bond from the same issuer. Show the expected value of the bond at the end of each year in...

If one-period forward rates are decreasing with maturity, the yield curve is most likely: A) flat....

If one-period forward rates are decreasing with maturity, the yield curve is most likely: A) flat. B) upward sloping. C) downward sloping.

1.Empirical evidence shows that the implied forward rates derived from a spot rate curve based on...

1.Empirical evidence shows that the implied forward rates derived from a spot rate curve based on the pure expectations theory are A.upward-biased predictors of future spot rates B.unbiased predictors of future spot rates C.downward biased predictors of future spot rates 2. Empirical evidence suggests that historically, short-term spot rates on average are higher relative to long-term spot rates most of the time. True False 3. When the spot rate curve is upward sloping, the implied forward rate: A.is above the...

(i) Distinguish between spot and forward foreign exchange transactions. (ii) Describe how are spot and...

(i) Distinguish between spot and forward foreign exchange transactions. (ii) Describe how are spot and forward quoted in the foreign exchange market. (iii) Andreas Broszio just started as an analyst for Credit Suisse in Zurich, Switzerland. He receives the following quotes for Swiss francs against the dollar for spot, one-month forward, 3-months forward, and 6-months forward. 10+15 Spot exchange rate: Bid rate SF 1.3075/$ Ask rate SF 1.3085/S One-month forward 15 to 20 3-months forward 16...

Q 1 Explain the difference between spot exchange rates and forward exchange rates. Briefly explain how...

Q 1 Explain the difference between spot exchange rates and forward exchange rates. Briefly explain how the forward exchange market works.

Spot and forward exchange rates for the British pound are as follows: Spot exchange rate =...

Spot and forward exchange rates for the British pound are as follows: Spot exchange rate = 1.4500 USD/GBP, 90-day forward exchange rate =1.4416 USD/GBP, 180-day forward exchange rate = 1.4400 USD/GBP. Additionally, a 180-day European call option to buy 1 GBP for USD 1.42 costs 3 cents, and a 90-day European put option to sell 1 GBP for USD 1.49 costs 3 cents. Which of the following is the correct arbitrage strategy? Select one: Buy the 90-day forward contract and...

What is the relationship between currency values or exchange rates (both spot and forward), interest rate...

What is the relationship between currency values or exchange rates (both spot and forward), interest rate differentials between countries, and inflation rate differentials between countries? If possible, use a diagram to explain how these various measures are related and/or impact each other.

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