Question

Please answer E, F, & G.

d 1. Explain the following terms as concisely as with Also, for each term, discuss real-world applications with respect che, if you found any u mpleng nce, purpose, motivation, a b. Hedging c. Arbitrage d Risk Finance LIBOR and SOFR Sered Overnight Facing Rate) REER (Realflective Exchange Rate)

Answer 1

Answer e) LIBOR and SOFR:

The London interbank offered rate (LIBOR) ,started in the mid-1980s, has been go-to interest rate used by banks to peg their loan agreements. The calculation is an average interest rate based on five currencies, the rate is used as benchmark for the major banks around the world. After the global economic crisis of 2008, banks are searching for alternative.

The secured overnight financing rate (SOFR) is an initiative by the Federal Reserve started in April-2018 to replace LIBOR. This is an effective interest rate that financial institutions use to price U.S. dollar-denominated derivatives and loans. SOFR is calculated on the net transactions in the Treasury repurchase market.

Answer f) Financial Derivatives: A derivative is a popular financial contract, whose value is derived upon underlying financial asset. The asset may be individual or a set of assets. Some Common underlying assets are bonds, equity, currencies, market indexes, and other derivatives as well.

Answer g) REER :The real effective exchange rate (REER) is the weighted average exchange rate calculation of domestic currency in relation to basket of major currencies. In calculation, the weights of currencies are calculated by counting the relative trade performance of domestic currency against other country’s currency in the basket. The REER is used to find a currency value relative to the other major currencies in basket.