Assignment on Exchange Instrument | Answers

Assignment on Exchange Instrument
Answer 1 part 1
Spot Rate
1
Sterlin
g = 1.255 1.26
1.257
5
Forward Rate (3 months)
1
Sterlin
g = 1.23 1.245
1.237
5
New York interest rate (mid
Rate) 3%
London Interest Rate (mid
rate ) 5%
Ans 1
Testing Interest Rate parity
Spot Rate * ((1+ Intrerest rate (d) * Months/12))/ (((1+ Intrerest rate (f) *
Months/12))
For Bid Rate
1.249
For Ask Rate
1.254
For mid rate
1.251
Interest rate parity does not hold as forward rate are
different
Mid
rate
Pairty Forward rate 1.249 1.254 1.251
Answer 1 part 2
Amount to Invest
Sterlin
g 100000
If converted and
invested Non conversion
Step 1 Step 1 Invest on 1250

Sterling
Convert Sterling
to Dollar
12550
0
Step 2
Amount after 3
months
1012
50
Invest for 3
months 313.75
Step 3
Convert at
forward rate
10105
5.2
Differential
194.77
91
Parity
absent
Proposed forward
rate 1.2426
Answer 1 part 3
There is difference in forward rate (mid rate) as derived in part 1 and part 2 of the solution
detailed in excel on account of bid ask spread rate . As in first question, mid-rate is computed
by taking average of bid and ask rate. However, in the second case the ask rate is considered
for determining the answer to money market operations which has accounted for such
differential.
A brief summary of the computation carried out in part 1 and part 2 of the assignment is
detailed as under:
Part 1
Testing Interest Rate parity
Spot Rate * ((1+ Intrerest rate (d) * Months/12))/ (((1+ Intrerest rate (f) *
Months/12))
For Bid Rate
1.249
For Ask Rate
1.254

For mid rate
1.251
Interest rate parity does not hold as forward rate are
different
Mid rate
Parity Forward rate 1.249 1.254 1.251
Part 2
Amount to Invest
Sterlin
g
1000
00
If converted and
invested Non conversion
Step 1
Step 1 Invest on
Sterling 1250
Convert Sterling to
Dollar
12550
0
Step 2
Amount after 3
months
1012
50
Invest for 3 months 313.75
Step 3
Convert at forward
rate
10105
5.2
Differential
194.77
91
Parity
absent
Answer 2
XX
Amount to
Borrow USD
200000
00
Time 2 Years
Borrow at fixed
rate
Semi
annual
basis
Fixed Rate 8%
Floating Rate
LIBOR +
24BPS BID
Floating Rate
LIBOR +
64BPS OFFER