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In part (a) use discount rate $e^.07 -1 = .072508181$ to get the right answer. For part (b) I am just giving you hint: Calculate bond price at the end of 1st year and 2nd year in the same way as you did in part (a). Use the above calculated price to buy bond from the dividend at the end of first and second year. You may assume bond can be purchased in ...


The rate is the return on your investment. Since you'll receive 100\$ after 12 months, $\frac{100 - P}{P} = \frac{100 - 89.0}{89.0} = \frac{11}{89} = 12.36 \%$. Same for the 6-month T-Bill: $\frac{100 - P}{P} = \frac{100 - 94.0}{94.0} = \frac{6}{94} = 6.38 \%$.


The question is asking if there is a way to create arbitrage by borrowing in one currency, exchanging at the current spot rate, lending in another currency and converting the future payments back to the original currency at the forward exchange rate. Specifically, given the assumption above, if there were no arbitrage the inequality above could not hold. ...


Portfolios for some kind of investors effectively balance asset investments with liabilities incurred. Think about a pension account, where the future liability of the pension payment represents the liability and the currently invested monies are the assets. I am sure you can think of other similar situations but I will illustrate regarding pensions below. ...


As the asker already found out: No this is not simply the answer. $S_T$ is not known at the moment of investment so the future profit is a function of the stochast $S_T$. A graph is a useful tool to gain insight into the amount of profit for each realized value of $S_T$.

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