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Question;1) If;the current interest rate on 1 year T-notes is 0.194% and the projected;inflation rate is 1.6%, what is the anticipated Real Interest Rate?;2) If the;current interest rate on the 2 year;Treasury Note is 0.28% and the rate on;the 3 year T-Note is 0.36%, what is the implied 1 year rate going to be two;years from now?;2 year Treasury Note =;0.28%;3 year Treasury Note =;0.36%;1 year implied rate 2 years from now =;0.52%;3) Currently 5 year T-notes provide a yield to;maturity of 0.648% per year. At the same;time, TIPS (Treasury Inflation Protected Securities) with a 5 year maturity;provide a yield (before inflation) of -1.096% per year. What is the implied annual inflation rate;over the next 5 years?;4) You;will be receiving payment of NP 1 million from a client in Mexico one year from;now. The current spot rate for the Peso;is 1 NP = US\$ 0.10. The current price of;Peso futures is 1NP = US\$ 0.102. Your;expectation of the peso spot rate one year from now is;Possible Outcome;for;Future Spot Rate;Probability;0.09;10%;0.095;70%;.11;20%;a) What would be your gain or loss from;purchasing Pesos in the forward market under each of the 3 scenarios?;b) Given;your estimated probabilities for each scenario, what would be your average gain;or loss?;5. Assume the following information;? British;pound spot rate = \$1.58;? British;pound one-year forward rate = \$1.58;? British;one-year interest rate = 11%;? U.S.;one-year interest rate = 9%;a.;Explain how U.S. investors could use covered interest;arbitrage to lock in a higher yield than 9%. What would be their net gain (per;Dollar) from doing so?;b.;If a large number;of investors undertook this transaction, explain how the spot and forward rates;of the pound would change as covered interest arbitrage occurs.

Paper#50419 | Written in 18-Jul-2015

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