4.8. TEST YOUR UNDERSTANDING 169
3.7.2 Applications
- Check analytically the equivalence of the two alternative ways to do the fol-
lowing trips:
(a) Financing of international trade: you currently hold afcclaim on a
customer payable atT, but you want cashhcinstead.
(b) Domestic deposits: you currently hold spothcand you want to park that
money inhc, risk-free.
(c) You want to borrowhcfor 3 months.
(d) Immunizing ahcdent: you want to set aside some of your cashhcso as
to take care of a futurefcdebt.
(e) Borrowingfc. You want to borrowfcbut a friend tells you that swapping
ahcloan is much cheaper- You hold a set of forward contracts oneur, againstusd(=hc). Below I show
you the forward prices in the contract; the current forward prices (if available)
or at least the current spot rate and interest rates (if no forward is available
for this time to maturity). Compute the fair value of the contracts.
(a) Purchased: eur1m 60 days (remaining). Historic rate: 1.350; current
rate for same date: 1.500; risk-free rates (simple per annum): 3% inusd,
4% ineur.
(b) Purchased:eur2.5m 75 days (remaining). Historic rate: 1.300; current
spot rate: 1.5025; risk-free rates (simple per annum): 3% inusd, 4% in
eur.
(c) Sold: eur0.75m 180 days (remaining). Historic rate: 1.400; current rate
for same date: 1.495; risk-free rates (simple per annum): 3% inusd, 4%
ineur.- 60-day interest rate (simple, p.a.) are 3% at home (usd) and 4% abroad (eur).
The spot rate moves from 1.000 to 1.001.
(a) What is the return differential, and what is the corresponding prediction
of the change in the forward rate?
(b) What is the actual change in the forward rate?
(c) What is the predicted change in the swap rate computed from the return
differential?
(d) What is the actual change in the swap rate?- 60-day interest rate (simple, p.a.) are 3% at home (usd) and 4% abroad (eur).
The spot rate is 1.250.
(a) Check that investingeur1m, hedged, returns as much asusd1.25m