. Neither model depends on current economic conditions. Credit scores do not explicitly depend on current economic conditions. Credit ratings do not explicitly depend on the business cycle, which, in turn, is affected by current economic conditions.
because the statement is correct. because the statement is correct.

1 Drawbridge sold AUD 5 million forward to the settlement date at an all-in forward price of 0.8940 (USD/AUD).
2 To mark the position to market, Drawbridge offsets the forward transaction by buying AUD 5 million three months forward to the settlement date.
3 For the offsetting forward contract, because the AUD is the base currency in the USD/AUD quote, buying AUD forward means paying the offer for both the spot rate and forward points.
I. The all-in three-month forward rate is calculated as 0.9066 – 0.00364 = 0.90296
II. This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90296) = –USD44,800 (This is a cash outflow because Drawbridge sold the AUD for- ward and the AUD appreciated against the USD).
4 To determine the mark-to-market value of the original forward position, calculate the present value of the USD cash outflow using the three-month USD discount rate: –USD44,8000/[1 + 0.0023(90/360)] = –USD44,774.
The present value of the cash flow was not calculated (step 4 of
calculation).
The cash flow was calculated using the bid rate instead of the offer rate.
1 The all-in three-month forward rate = 0.9062 – 0.00368 = 0.90252
2 This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90252) = – USD42,600, and the present value is calculated as –USD42,600/[1 + 0.0023(90/360)] = –USD42,576.

. Annisquam is incorrect in Comment 1. The interest rate tree performs two functions in the valuation process: (1) generating the cash flows that are interest rate dependent and (2) supplying the interest rates used to determine the present value of the cash flows.
because Comment 3 is correct. because Comment 2 is correct.

. Both points that Marlin makes regarding structural models of credit risk are correct.
because the first point is correct.
because the second point is correct.

There is a direct relationship, not an indirect one, between estimated poten- tial GDP growth and credit quality: Higher growth leads to higher quality—that is, an improvement in the likelihood of promised cash flows occurring.
Gillibrand’s statement is accurate. In the long run, the growth rate of GDP dominates. The ratio of earnings to GDP can neither rise nor decline forever, so over the long term it must approximate zero. Similarly, the P/E ratio cannot grow or contract forever, so over the long term it must also approximate zero. Thus, the drivers of potential GDP are ultimately the drivers of stock market performance. Navarro’s statement is accurate. The growth rate of potential GDP is an important determinant of the level of real interest rates, and thus real asset returns in general, in the economy. Faster growth in potential GDP means consumers expect their real income to rise more rapidly. Thus, higher rates of potential GDP growth translate into higher real interest rates and higher expected real asset returns in general.