Find a quote in USD on the forward price to charge
Find a quote in USD on the forward price to charge for the delivery in 6 months of a British bond with a face value of $1000 and semiannual coupons of 8% per annum. The UK and US Yi-eld curves are stated in simple and continuously compounded interest rates. The spot exchange rate is $2.2 per $
Maturity in years 1.5 1 .75 2.0
UK Simple interest rate 6.0% 6.25% 6.5%
US Continuously compounded rate 4.1% 4.5% 4.75%
FIND
Price in pounds of the British bond.
The amount borrowed in US dollars to implement the repli- cation strategy of buying the British bond in the spot market and selling intermediate incomes.
The US dollar forward price quote.
The forward price for the same British bond in the UK in pounds.
The forward exchange rate for 6 months.
The dollar cost of buying the bond forward in the UK using the 6 month forward exchange market.
Compare your answers to c and f and describe the arbitrage if the answer to c was below that in f:
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Solution: Find a quote in USD on the forward price to charge