10. The current exchange rate is $1.10/. The 1-year forward is $1.15/. The interest rate...
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10. The current exchange rate is $1.10/. The 1-year forward is $1.15/. The interest rate in Europe is 2%. The interest rate in the USA is 5%
a) Is this possible? What is the underlying concept of this question?
b) Why might this company prefer to hedge this risk with options rather than forward contracts ?
c) Consider a 10-year fixed bond with 10% annual coupons. The duration is 8.76 years and the face value is 300. Suppose the yield decreases from 10% to 9.75%. According to the duration/sensitivity approach, by how much will the value of the bond change (euros increase or euros decrease)?
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