FIN 3410 Lecture Notes - Lecture 13: Arbitrage

• School: University of Denver
• Department: Finance
• Course: FIN 3410
• Professor: Khindanova Irina

Document Summary

The fund manager borrowed y 1 billion for one year and invested in the us. Ex ch15 4: a loss is okay. Io$ = ,000,000 initial investment in pure-discount bonds. I1$ = ,650,000: $ appreciation against y. I1y = i1$ * s1(y/$: ,650,000 * y 110/$ = y 1,171,500,000. Ry = (i1y - ioy) / ioy: ,000,000 * y 80/$ = y 800,000,000, (y 1,171,500,000 y 800,000,000) / y 800,000,000 = . 4644, = 46. 44% Ry = r$ + ey/$ + (r$ * ey/$) Rate of change in the exchange rate: e(y/$) = [s1(y/$) so(y/$)] / so(y/$, (y 110/$ - y 80/$) / y 80/$ = 0. 375, = 37. 5% Ry = 0. 065 + 0. 375 + (0. 065 * 0. 375) = . 4644: = 46. 44% total rate of return is 46. 44%, of which 37. 5% is due to $ appreciation against y, r$ < ry. A japanese investor benefited from $ appreciation against y. 1 share 1 adr on nyse.