Question
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to appreciate from its current level of 0.5 to 0.55
Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to appreciate from its current level of 0.5 to 0.55 in 30 days. Denver Financial seeks to capitalize on this potential opportunity.
Suppose that Denver Financial begins by borrowing $30,000,000 and converting it to New Zealand dollars (NZ$).
The following table shows the short-term interest rates (annualized) in the interbank market.
Currency | Lending Rate | Borrowing rate |
---|---|---|
(Adjusted for 30-day period) | (Adjusted for 30-day period) | |
U.S. Dollars | 6.62% | 7.10% |
New Zealand Dollars (NZ$) | 6.38% | 6.86% |
Suppose that Denver Financials initial loan of $30,000,000 must be repaid with a rate of 0.0059 after 30-days.
Hint: Assume 360 days in a year.
Thus, at the end of 30-days, Denver Financial must repay a total of $(33,195,250, or 36,213,000, or 30,177,500, or 39,230,750) (U.S. dollars) from the initial loan. In New Zealand dollars, at the new predicted 0.55 spot rate, this repayment would be equivalent to NZ $(38,407,727.27, or 54,868,181.82, or 49,381,363.64, or 43,894,545.46) (New Zealand dollars).
The bold are the option choices and could you please explain, thank you.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started