Question
New Zealand Citizen Bank just made a one-year NZ$10 million loan that pays 10 percent interest annually. The loan was funded with an Australian dollar-denominated
New Zealand Citizen Bank just made a one-year NZ$10 million loan that pays 10 percent interest annually. The loan was funded with an Australian dollar-denominated (A$) one-year deposit at an annual rate of 6 percent. The current spot rate is A$0.9500/NZ$1.
(a)What will be the net interest income in New Zealand dollars on the one-year loan if the spot rate at the end of the year is A$0.9300/NZ$1?
(b)What will be the net return on the loan?
(c)What is the total effect on net interest income and principal of this transaction given the end-of-year spot rates in part (a)?
(d)How far can the A$/NZ$ appreciate before the transaction will result in a loss for New Zealand Citizen Bank?
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