1
1) no, EURUSD is quoted as USD per Euro. Therefore if you sell 1M Euros for 1.08 and buy them back one month forward for 1.10 you will lose USD 20,000.
2) during the month you will have to pay interest on the Euros you borrowed and receive interest on the dollars you own , which will be a net positive.
3) it sounds like you want to sell EURUSD 2mo ...
1
To answer this question, we must fix a bit of the vocabulary, first. I will try to stick as close as possible to your conventions:
Spot rate: (also called zero rate) is the annualised rate of return on a non-coupon-bearing bond (hence zero coupon bond). For a given maturity $t$, let us call $r_t$ the corresponding spot rate, i.e. we have
$$
PV_0(t)=\left(\...
1
I believe you are applying the cap formula to value the floor.
From the link you sent, try this:
$$floorlet = D [(K-F)N(-d) + \sigma \sqrt{T} n(d)] $$
Where the d will be the same.
1
This is already answered but you should be more clear as I can see this is a problem for the FM exam. You probably meant $i^{(4)}=2\%$ and the annuity is due (first payment is due immediately), you also need to clarify the amount of each payment which is probably 1 annually payable quarterly (0.25 dollars every 3 months).You can use the formula $\ddot a_{n,j}...
Only top voted, non community-wiki answers of a minimum length are eligible
