1. On February 4 of a particualr year, the spot rate for U.S. Dollar ($) expressed in euros was $07873/euro. The U.S. interest rate (Compounded semiannually) was 5.36 percent, whereas the euro interest rate (compounded semiannually) was 3.11 percent. From a European prospective, what should be the forward rate of a contract that expires september 4? (Assume that each month is one-twelfth of a year).
2. On November 1, the one-month LIBOR rate is 4.0 percent and the two-month LIBOR rate is 5.0 percent. Assume that fed funds futures contracts trade at a 25 basis point rate under one-month LIBOR at the start of the delivery month. The december fed funds futures is quoted at 94.75. Assuming no baisis risk between fed funds and one month LIBOR at the start of the delivery month, identify whether an arbitrage opportunity is available. Contract size is $5,000,000. Be sure to illustrate the arbitrage strategy for one contract. To show the dollar arbitrage, assume that one month LIBOR rate on December 1 was 7 percent.
3. A corporate case manager who often invests her firm's excess cash in the Eurodollar market is considering the possibility of investing $20 million for 180 days directly in a Eurodollar CD at 6.15 percent. AS an alternative, she considers the fact that the 90-day rate is 6 percent and the price of a Eurodollar futures expiring in 90 days is 93.75 (the IMM index).She believes that the combination of the 90-day CD plus the future contract would be a better way of lending $20 million for 180 days. Suppose she executes this strategy and the rate on 90-day Eurodollar CDs 90 day later is 5.9 percent. Determine the annualized rate of return she earns over 180 days and compare it to the annualized rate of return on the 180 day CD.
4. On Jul 5, a stock inex futures contract was at 394.85. The index was at 392.54, the risk-free rate was 2.83 percent, the dividend yield was 2.06 percent, and the contract expired on September 20. determine whether an arbitrage oppourtunity was available and explain what transactions were executed. The accrued interest is 3.29 on june 1 and 6.16 on September 1. Explain the impact on the implied repo rate of changing from the bid to the offer future price of the longer-date future contracts.