Suppose you sign a swap agreement with a bank to buy 100,000 Japanese Yen each year for the next five years. In exchange you will be paying X US Dollars each year.

The current exchange rate is 100 Yen per one US Dollar. The yields on 1-year, 2-year, 3-year, 4-year, and 5-year zero coupon bonds in the US are 1%, 2%, 3%, 4%, and 5% (annualized). The yields on all such bonds in Japan is 1% (so the yield curve is flat). All interest rates are continuously compounded.

(1) What are the forward prices in Dollar per Yen of forward contracts with maturity in one, two, three, four, and five years from now (round to the sixth decimal point)?

(2) What is the fair price X?

Answer rating: 100% (QA)

1 Dollar per yen today 1100 001Yen Forward price after one year 001 ... View the full answer