Assume an offshore FX derivative market is unavailable for Dominican Republic Peso (DOP) and a corporation approaches
Question:
Assume an offshore FX derivative market is unavailable for Dominican Republic Peso (DOP) and a corporation approaches a commercial bank offshore to sell its DOPrevenues and buy USD. Determine the price of a one-yearUSDDOPFX nondeliverable forward (NDF) under the following assumptions:
• The withholding tax on investing in investments in DOP fixed income instruments is 10 percent.
• The current one-year Dominican Republic treasury bills yield at 9.5 percent.
• The one-year USD dollar rate of 0.40 percent.
• The same convention applies to DOP and USD rates.
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If a market does not exist pricing offshore NDFs will be based on arbitragefree opportunities Therefore if a financial institution based offshore want...View the full answer
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