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Suppose today two-year US treasury bill is 2.15% and the two-year UK treasury bill is 1.0%....

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Finance

Suppose today two-year US treasury bill is 2.15% and thetwo-year UK treasury bill is 1.0%. Further suppose today spotexchange rate is USD 1.25 per Euro and you know you will receiveone million euro exactly two years from now and you will have toexchange those Euros in USD at that time. Can you engineer aguaranteed exchange rate at which you will be able to exchange theEuros for USD two years from now? Explain the arrangements.

Answer & Explanation Solved by verified expert
4.3 Ratings (545 Votes)
In order to guarantee an exchange rate after two years one needs to implement a moneymarket hedge which can be executed as described below EUR Receivable 1000000 EUR EUR Interest Rate 1 and    See Answer
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Transcribed Image Text

Suppose today two-year US treasury bill is 2.15% and thetwo-year UK treasury bill is 1.0%. Further suppose today spotexchange rate is USD 1.25 per Euro and you know you will receiveone million euro exactly two years from now and you will have toexchange those Euros in USD at that time. Can you engineer aguaranteed exchange rate at which you will be able to exchange theEuros for USD two years from now? Explain the arrangements.

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