Question
Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply:(show all
Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply:(show all steps for your solution)
Currency | Lending Rate | Borrowing Rate |
Dollars | 7.10% | 7.50% |
New Zealand dollar (NZ$) | 6.80% | 7.25% |
Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?
1. | Borrow $5 million. |
2. | Convert $5 million to NZ$: ? |
3. | Invest the NZ$ at an annualized rate of 6.80% over five days: ? |
4. | Convert the NZ$ back to dollars: ? |
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5. | Repay the dollars borrowed. The repayment amount is: ? |
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6. | After repaying the loan, the remaining dollar profit is: ? |
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