Suppose that there is uncertainty in terms of what the Federal Reserve (Fed) will do. Agents perceive that the probabili
Posted: Wed Jul 06, 2022 5:55 am
Suppose that there is uncertainty in terms of what the FederalReserve (Fed) will do. Agents perceive that the probability thatthe Fed will not raise the US interest rate, while the probabilityof observing a raise is 30%. Suppose the firm has thepossibility of signing a forward contract to buy/sell Euros at aforward rate Eeuro/$ = 1.37, but this contract has a cost κ. Whatis the maximum value of κ that the firm is willing to pay? Providean explanation for your results.