Suppose that three month interest rates in Australia are 7.66% for borrowing and 5.66% for lending...

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Suppose that three month interest rates in Australia are 7.66% for borrowing and 5.66% for lending and in New Zealand they are 8.63% for borrowing and 6.63% for lending. If the current spot rate is 1.1578/ 1.1601 AUD/NZD and the current three month forward rate is 1.020 / 1.046 AUD/ NZD. a) Would investors in either Australia or New Zealand be likely to invest overseas? b) As an arbitrageur where would you borrow? c) Assuming no additional transaction costs, what percentage arbitrage profit could be generated (Calculate as a percentage of your initial borrowings)? Suppose that three month interest rates in Australia are 7.66% for borrowing and 5.66% for lending and in New Zealand they are 8.63% for borrowing and 6.63% for lending. If the current spot rate is 1.1578/ 1.1601 AUD/NZD and the current three month forward rate is 1.020 / 1.046 AUD/ NZD. a) Would investors in either Australia or New Zealand be likely to invest overseas? b) As an arbitrageur where would you borrow? c) Assuming no additional transaction costs, what percentage arbitrage profit could be generated (Calculate as a percentage of your initial borrowings)?

Answer rating: 100% (QA)

ANSWER To determine whether investors in Australia or New Zealand would be likely to invest overseas we need to compare the interest rate differentials and the forward exchange rates a Australia The i... View the full answer