### TREASURY MANAGEMENT - PAPER 1 In Tutorial Library

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### TITLE: TREASURY MANAGEMENT - PAPER 1

#### CLASS / COURSE: Foreign Exchange

QUESTION DESCRIPTION:

TREASURY MANAGEMENT - PAPER 1

Find the 90-day and 180-day interest rates from the Financial Times website for the dollar, yen, euro and pound. Are the yield differentials on these currencies consistent with the futures rates for Mar 2010 and June 2010 reported on the Wall Street Journal? What might account for the differences? Explain and comment.

URL 1: http://markets.ft.com/ft/markets/researchArchive.asp?report=EUR&cat=BR
URL 2: http://online.wsj.com/mdc/public/page/2_3023-fut_currency-futures.html?mod=topnav_2_3051

Notes from Professor: In this question you are supposed to work out a theoretical forward price using:

F_{theory} = S*(1+i_{h}/n)/(1+i_{f}/n)
where S is spot price, i_{h} is the home interest rate, i_{f} us the foreign interest rate and n is either 4 or 2 (see later).

Then you should compare this to the market futures price F_{mkt} which you will find on the WSJ website. You will notice that the futures price on the WSJ website have maturities of March 2010 and June 2010.

However when you get rates from the FT website they are for 90 days and 180 days. The best thing to do is to go back 90 days from March expiry date which will get you back to approximately 15 Jan 2010 (similarly going back 180 days from the June expiry will also get you to 15 Jan 2010).

Now download the spot rate that was reported for 15 Jan (from WSJ), the home interest rate and the foreign interest rate that held on the 15 Jan (from FT but remember these are annual rates). Then your theoretical forward price will be equal to F_{theory} = S*(1+i_{h}/n)/(1+i_{f}/n) where n = 4 for the March expiry and n =2 for the June expiry. You can then download the market futures price that held on the 15 Jan 2010, F_{mkt}.
Then you can compare these two and comment on why they are different.

SOLUTION DESCRIPTION: Completed Solution is attached. Click on Buy button and then download file to get full solution.

SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Corporate Finance

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