Question: Compare the analyses in Exercises 4 and 5 with a rolled-over money-market hedge. That is, what would have been the result if you had borrowed

Compare the analyses in Exercises 4 and 5 with a rolled-over money-market hedge. That is, what would have been the result if you had borrowed waf for six months (with conversion and investment of fly-the money-market replication of a six-month forward sale), and then rolled-over (that is, renewed) the waf loan and the fly deposit, principal plus interest?

Use the following time-0 data for the fictitious currency, the Walloon Franc (waf) and the Flemish Yen (fly), on Jan. 1, 2000. The spot exchange rate is 1 waf/fly.

Interest rates FLY 5% 5% Swap rate 180 days 360 days WAF WAF/FLY 10.125% 0.025 10.250% 0.050

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Borrow fly 500000 1025 487 80488 convert into waf and invest The values are ... View full answer

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