Question

In: Finance

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.1 ,...

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.1 , while the one-year interest rate is 0.07. Assume that the liquidity premium on a two-year security is 0.003. Use this information to re-estimate the one-year forward rate. Enter the answer in decimal form using 4 decimals (e.g. 0.1234)

Solutions

Expert Solution

One Year forward rate one year =(1+2 year rate)^2/(1+1 year rate)-1-Liquidity Premium/(1+One year rate)
=(1+0.1)^2/(1+0.07)-1-0.003/(1+0.07)=0.1280

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.11 ,...
Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.11 , while the one-year interest rate is 0.02. Use only this information to estimate the one-year forward rate. Enter the answer in decimal form using 4 decimals (e.g. 0.1234)
Forward Rate. Assume that as of today, the annualized interest rate on a three-year security is...
Forward Rate. Assume that as of today, the annualized interest rate on a three-year security is 0.12, while the annualized interest rate on a two-year security is 0.03. Use only this information to estimate the one-year forward rate two years from now. Enter the answer in decimal form using 4 decimals (e.g. 0.1234)
Assume that interest rate parity exists. If the forward rate is an unbiased forecast of the...
Assume that interest rate parity exists. If the forward rate is an unbiased forecast of the future spot rate , explain the implications from borrowing a foreign currency (versus local financing) over time.
Today, the continuous compound interest rate is 0.1% and one share of Amazon is $2367.92. 1....
Today, the continuous compound interest rate is 0.1% and one share of Amazon is $2367.92. 1. What price do you expect Amazon to be 6 months from now? What European style option should you buy in this case? Your future price can’t be a whole dollar, everyone should have different future stock price. 2. Assume the volatility of Amazon is 27% and you set your own strike price to 2 decimal places, find out how much your option in part...
Today, the continuous compound interest rate is 0.1% and one share of Amazon is $2367.92. 1....
Today, the continuous compound interest rate is 0.1% and one share of Amazon is $2367.92. 1. What price do you expect Amazon to be 6 months from now? What European style option should you buy in this case? Your future price can’t be a whole dollar, everyone should have different future stock price. 2. Assume the volatility of Amazon is 27% and you set your own strike price to 2 decimal places, find out how much your option in part...
Assume the following information regarding U.S. and Canadian annualized interest rates: Currency Lending Rate Borrowing Rate...
Assume the following information regarding U.S. and Canadian annualized interest rates: Currency Lending Rate Borrowing Rate U.S Dollar ($) 5.89% 6.35% Canadian Dollar (C$) 5.6% 6% Piggy Bank can borrow either $20 million or C$30 million. Furthermore, Piggy Bank expects the spot rate of the Canadian dollar to be $0.82 in 60 days (the current spot rate is $0.80). 8. What is the profit or loss from Piggy Bank's speculation if the spot rate 60 days from now is indeed...
The interest rate on a one-year bond selling today is 3% and the interest rate on...
The interest rate on a one-year bond selling today is 3% and the interest rate on a two-year bond selling today is 4%. According to expectations theory people expect the interest rate on a one-year bond selling one year from today to be about
Suppose the interest rate on a one-year bond today is 6% per year, the interest rate...
Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two years from now is expected to be 3% per year. Assuming risk neutral investors, what is the interest rate today on a two-year bond? On a three-year bond? What is the shape of the yield curve?
You invest $1000 today. If that money grows at an annualized rate of 2% for the...
You invest $1000 today. If that money grows at an annualized rate of 2% for the next 7 months and then at an annualized rate of 16% for the next 3 months after that, how much will your investment grown to by the end of the 2nd period. Assume you made no withdrawals or additional investments.
Today, the one-year U.S. interest rate is 2%, while the one-year interest rate in Mexico is...
Today, the one-year U.S. interest rate is 2%, while the one-year interest rate in Mexico is 8%. The spot rate of the Mexico peso (MXP) is $.06 The one-year forward rate of the MXP exhibits a 10% discount. Determine the yield (percentage return on investment) to an investor from Mexico who engages in covered interest arbitrage.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT