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# Answer must be well illustrates and written in essay form

Answer must be well illustrates and written in essay form
Answered Same Day Apr 30, 2020

## Solution

Abr Writing answered on May 01 2020
Part 1
We know that as per interest rate parity
(1 + id)/ (1 + if) = (S / F)
idÂ gives the interest rate of the domestic cu
ency
ifÂ gives the interest rate in the foreign cu
ency
S spot foreign exchange rate
F forward foreign exchange rate
In the given diagram we can observe that
Id is equal to domestic interest rate which is equal to
Here we can observe that if we invest \$ 1000000 directly in domestic cu
ency we will get return of 8% as domestic rate id and in 90 days amount will be 8%*90/360 that is 2% higher than the invested amount.
Thus Final amount after 90 days by investment in domestic cu
ency will be equal 1000000*1.02 = \$ 1020000
Alternatively if investor invest in foreign funds then due spot exchange rate of 1.48 his funds will be worth 1.48*1000000 = 1480000
Since foreign interest rate is 4% per year, thus 90 days amount will be 4%*90/360 that is 1% higher than the invested amount.
Thus Final amount after 90 days by investment in domestic cu
ency will be equal 1480000*1.01 = 1010000 = 1494800
The final amount received by investor in domestic cu
ency is 101993, this implies that future exchange rate F = 1494800/101993 = 1.4655
Thus S/F = 1.48/1.4655 = 1.0099
(1 + id)/ (1 + if) = 1.02/1.01 = 1.0099
Hence the interest rate parity holds
Part 2
1
Option Type: 1=Call, 2=Put
1
Exercise...
SOLUTION.PDF