Question
3) . Assume the following information: U.S. deposit rate for 1 year = 11% U.S. borrowing rate for 1 year = 12% New Zealand deposit
3) . Assume the following information:
| U.S. deposit rate for 1 year | = | 11% |
| U.S. borrowing rate for 1 year | = | 12% |
| New Zealand deposit rate for 1 year | = | 8% |
| New Zealand borrowing rate for 1 year | = | 10% |
| New Zealand dollar forward rate for 1 year | = | $.40 |
| New Zealand dollar spot rate | = | $.39 |
Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.
Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?
| a. | $238,584. |
| b. | $240,000. |
| c. | $234,000. |
| d. | $236,127. |
The answer is D. And I've copied the steps below. Can someone please explain in detail exactly what each of these steps mean? Thanks so much.
| 1. | Borrow NZ$545,455 (NZ$600,000/1.1) = NZ$545,455. |
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| 2. | Convert NZ$545,455 to $212,727 (at $.39 per NZ$). |
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| 3. | Invest $212,727 to accumulate $236,127 ($212,727 1.11) = $236,127. |
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Handbook On Corporate Governance In Financial Institutions
Authors: Christine A. Mallin
1st Edition
1784711780, 978-1784711788
