Today is t = 0. . The price of a Dollar 8-year zero coupon bond with...
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Today is t = 0. . The price of a Dollar 8-year zero coupon bond with Face Value = F is $1,600 • ro,5 = 2% (Dollar interest rate) f20,5 = 8% (Dollar forward interest rate) ● ● f 20,5 = 4% (Euro forward interest rate) • Contract X: for every $2 you give the bank at t = 8 they give you back 3 Euros at t = 20 o (or for every $2 you borrow at t = 8 you have to pay back 3 Euros at t = 20) • Contract Y: for every $2 you give the bank at t=0 they give you back 6 Euros at t = 25 o (or for every $2 you borrow at t = 0 you have to pay back 6 Euros at t = 25) for a given currency, a forward interest rate in that currency allows you to lock in a lending or borrowing rate for that currency for a certain period of time. Assuming there is no arbitrage, what is the value of F? Today is t = 0. . The price of a Dollar 8-year zero coupon bond with Face Value = F is $1,600 • ro,5 = 2% (Dollar interest rate) f20,5 = 8% (Dollar forward interest rate) ● ● f 20,5 = 4% (Euro forward interest rate) • Contract X: for every $2 you give the bank at t = 8 they give you back 3 Euros at t = 20 o (or for every $2 you borrow at t = 8 you have to pay back 3 Euros at t = 20) • Contract Y: for every $2 you give the bank at t=0 they give you back 6 Euros at t = 25 o (or for every $2 you borrow at t = 0 you have to pay back 6 Euros at t = 25) for a given currency, a forward interest rate in that currency allows you to lock in a lending or borrowing rate for that currency for a certain period of time. Assuming there is no arbitrage, what is the value of F?
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To find the value of F we can use the concept of no arbitrage and apply the principle of the Law of ... View the full answer
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