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Day 15 & 16 Notes

Problem

A. Explain the MMH Process for payable:

B. MMH Cost

Find PV(payable)

i. = Y 200,000,000 / (1 + 0.015)

ii. = Y 197,044,335 needed Y investment

Borrow $ to buy PV(payable)

iii. $ loan = Y 197,044,335 / (Y 110/$)

iv. = $1,791,312.14

Exchange borrowed $ for PV(payable)

v. = $1,791,312.14 * (Y 110/$)

vi. = Y 197,044,335

Invest Y 197,044,335 in Japan for 3m @ iY3m = 1.5%

At maturity, pay payable with the Y investment

vii. FV (Y 197,044,335) = Y 197,044,335 * (1 + 0.015)

viii. = Y 200,000,000 = payable

Repay $(loan + inv)

ix. $(loan + inv) = $1,791,312.14 * (1 + 0.01)

x. = $$1,809,225.26 MMH Cost

Sample Exam – 4

Background

payable = Y 400 m

t = 1 year

So = Y 120/$

F1 = Y 105/$

iY = 6%

i$ = 8%

1 year call

E = $0.0080/Y

C = 0.012 cents/Y $0.012/Y 100

o [0.012 cents / Y] * 100/100 = $0.012/Y 100

Problem

A. FH Cost = ? MMH Cost = ?

a. FH Cost = Y 400,000,000 / (Y 105/$) = $3,809,523.81

b. MMH Cost = $(loan + inv)

i. = [Y 400,000,000 / (1 + 0.06)] * [1 / (Y 120/$)] * (1 + 0.08)

ii. = $3,396,226

B. F1 = E[S1] the best predictor of future spot exchange rate

a. F1 = E[S1] = Y 105/$

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