Exchange Instrument Assignment: Interest Rate Parity and Swaps

This assignment solution analyzes exchange instruments, focusing on interest rate parity and currency swaps. Part 1 examines interest rate parity using spot and forward rates, demonstrating how the parity condition may not always hold due to bid-ask spreads. It includes calculations for investment returns under different scenarios and determines the proposed forward rate. Part 2 involves a currency swap scenario, calculating potential savings and the distribution of benefits between two companies. The solution further assesses the default risk associated with interest rate swaps, considering the obligations and potential financial burdens of the parties involved, referencing the financial crisis of 2008 and emphasizing the importance of enforceability in swap agreements. The assignment concludes by highlighting the potential for default based on the payment obligations and net effective interest rate.