Finance questions needed

Finance questions needed

Question
	
1) If
the current interest rate on 1 year T-notes is 0.194% and the projected
inflation rate is 1.6%, what is the anticipated Real Interest Rate?


















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2) If the
current interest rate on the 2 year
Treasury Note is 0.28% and the rate on
the 3 year T-Note is 0.36%, what is the implied 1 year rate going to be two
years from now?









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2 year Treasury Note =
0.28%



3 year Treasury Note =
0.36%



1 year implied rate 2 years from now =
0.52%









3) Currently 5 year T-notes provide a yield to
maturity of 0.648% per year. At the same
time, TIPS (Treasury Inflation Protected Securities) with a 5 year maturity
provide a yield (before inflation) of  -1.096% per year. What is the implied annual inflation rate
over the next 5 years?












4) You
will be receiving payment of NP 1 million from a client in Mexico one year from
now. The current spot rate for the Peso
is 1 NP = US$ 0.10. The current price of
Peso futures is 1NP = US$ 0.102. Your
expectation of the peso spot rate one year from now is:



Possible Outcome
for




 

 
 
Future Spot Rate

 		
 
 
Probability

 		


 

 
 
0.09

 		
 
 
10%

 		


 

 
 
0.095

 		
 
 
70%

 		


 

 
 
.11

 		
 
 
20%

 		






 






 









a) What would be your gain or loss from
purchasing Pesos in the forward market under each of the 3 scenarios?






b) Given
your estimated probabilities for each scenario, what would be your average gain
or loss?









5. Assume the following information:



 ¨ British
pound spot rate = $1.58



 ¨ British
pound one-year forward rate = $1.58



 ¨ British
one-year interest rate = 11%



 ¨ U.S.
one-year interest rate = 9%



 



a.
Explain how U.S. investors could use covered interest
arbitrage to lock in a higher yield than 9% . What would be their net gain (per
Dollar) from doing so?






b.
If a large number
of investors undertook this transaction, explain how the spot and forward rates
of the pound would change as covered interest arbitrage occurs.