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Describe how you would calculate a 5-year forward exchange rate of yen per dollar if you knew the...

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Describe how you would calculate a 5-year forward exchange rate of yen per dollar if you knew the current spot exchange rate and the prices of 5-year pure discount bonds denominated in yen and dollars.

Explain why this has to be the market price.

Non-arbitrage and Asset Pricing:

A class of pricing methods for assets is based on non-arbitrage, one way or another. The simple idea is that if two portfolio generates the same set of cash flows in all possible states of the world, then they must have the same present value, i.e., cost, to investors.

Answer and Explanation: 1

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Let {eq}p_d {/eq} and {eq}p_f{/eq} denote the price of the 5-year pure discount bond in dollars and yen. Assume that both bonds have the same nominal...

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Purchasing Power Parity & the Big Mac Index

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Chapter 7 / Lesson 9
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Discover what the big mac index theory is. See what the big mac index shows. Learn the definition of purchasing power parity (PPP) and the use of the PPP formula.


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