Description
- A U.S. investor bought a 6 year German federal bond (Bund), the face value of the bonds is 1,000 EUR, the coupon is 1.5%, and the price 1,125 EUR. At the time of buying the bond, the exchange rate was 1.3824 [USD/EUR], now, three years later, find the exchange rate for the Euro and use it to calculate the YTM of the bond in Euros and in Dollars. Suppose the exchange rate will continue at the rate you found and remember you have three years residual life.
- A firm is exporting products to England, the last shipment is sent today. The English firm will pay to the U.S. firm 2 MM [GBP] in three months, suppose December. The interest rate in England is 0.22 % per year. Find the spot, futures, and the interest rate in the US to decide if the firm should enter into a futures contract or do a synthetic forward.
- The central bank of a country, whose economy depend on exports, was proposing what they called Quantitative Easing, which is to buy back bonds to boost the economy by leaving lots of cash in the hands of banks, which are supposed to lend this cash. The congress, on the other hand, was screaming that a huge investment in roads, bridges, infrastructure in general, will do the trick. Which of them is right?, explain why and remember that the island economy is driven by exports.
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- Carry trade was mostly done by borrowing in Japan and lending in England due to the depreciated nature of the Yen at the time, coupled with high interest rates in England and a very appreciated Pound. Use the data in the spreadsheet ‘tbillsjapanV5’ to decide if you can also arbitrage between New Zealand and Japan. Suppose you borrow 1,000,000 [JPY] and lend in New Zealand at three months. Answer by interpreting a histogram with the frequency of gains/losses when arbitraging, use interest rate parity. Include histogram and frequency table in your answer.
For MGMT 615 students ONLY, also run a regression to test whether interest rate parity holds between Japan and New Zealand. Present the results of the regression and your interpretation on whether you can arbitrage or not.
