MATH 534 Midterm: MATH 537 UMass Amherst midtermF14soln
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Instructions: show all your work for full credit, and box your answers when appropriate. There are 5 questions: the rst 4 are each worth 10 points and the last one is worth. Unless otherwise noted, all risk free rates are per annum with continuous compounding: company a wishes to borrow 10 million usd. Company b wishes to borrow 12 million aud (australian dollars). The current fx (foreign exchange) rate is 1 usd for 1. 2 aud. Company a is o ered the following rates per annum: 10% usd, 8 % Company b is o ered the following rates per annum: 9 % usd, 9. 5% aud. The overall (annual) advantage is (10 8) (9 9. 5) = 2. 5% to be split between a and b after the bank takes 15 basis points (0. 15%) at each exchange for a total of. So a and b each have a 1. 1% annual advantage.
