The Assignment - Treasury and Risk Management

Running head: TREASURY AND RISK MANAGEMENT
Treasury and Risk Management
Name of the Student:
Name of the University:
Author’s Note:

DERIVATIVES1
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................3
References........................................................................................................................................6

DERIVATIVES2
Question 1
a) Forward Rate using Interest Rate Parity:
Spot Rate: (1.255+1.260)/2: 1.258
Forward Rate: ((1.230+1.2450)/2): 1.238
US Int Rate: 3% UK Int Rate: 5%
Forward Rate: Spot Rate: 1.258*(1+3%/1+5%)
Forward Rate: 1.2340
b) Arbitrage Method
Initial Sum from £ £ 100,000
Convert Sum by using USD
Spot Spot Rate
1.2575
USD Conversed Amount £ 125,750
Interest Rate in US 3.00%
USD Value after 3 Months $ 126,682.7
Convert the USD into £ £ 102,369.86
Less: Pay Interest on £ 3.00%
Amount Borrowed £ 100,000
Interest Amount £ 750
Gross Amount Earned in £ £ 101,619.86
Less: Borrowed Amount £ 100,000.00
Net Amount Earned £ 1,619.86
c) The forward rate used in Part A has been done using Interest Rate Parity while on the other
hand in order to well derive or estimate the forward rate the current 3 month forward rate for the
contract was considered.