Problem 4 Suppose that the 10-year US interest rate is 2%, the Brazilian interest rate is...
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Problem 4 Suppose that the 10-year US interest rate is 2%, the Brazilian interest rate is 9.5% and the exchange rate is 0.50 USD/BRL. Suppose that there is no default risk and that these rates are effective annual rates. (a) Compute the forward exchange rate to buy BRL with USD in 10 years. (b) Say that we commit to exchange 100 USD for BRL in 10 years at the forward rate in (a). Suppose that after 1 year, the exchange rate has stayed the same at 0.50 USD/BRL. The nine year rates are now 2.1% and 9% in USD and BRL, respectively. What is the value of your forward exchange contract? Problem 4 Suppose that the 10-year US interest rate is 2%, the Brazilian interest rate is 9.5% and the exchange rate is 0.50 USD/BRL. Suppose that there is no default risk and that these rates are effective annual rates. (a) Compute the forward exchange rate to buy BRL with USD in 10 years. (b) Say that we commit to exchange 100 USD for BRL in 10 years at the forward rate in (a). Suppose that after 1 year, the exchange rate has stayed the same at 0.50 USD/BRL. The nine year rates are now 2.1% and 9% in USD and BRL, respectively. What is the value of your forward exchange contract?
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