Question
Suppose the spot and one-year forward exchange rates on the New Zealand dollar are NZD1.055/AUD and NZD1.110/AUD, respectively. The risk-free rate is 5 percent per
Suppose the spot and one-year forward exchange rates on the New Zealand dollar are NZD1.055/AUD and NZD1.110/AUD, respectively. The risk-free rate is 5 percent per year in New Zealand and 3 percent per year in Australia.
Required:
(a) How can an investor go about exploiting the arbitrage opportunity? Show all necessary calculations. (12 marks)
(b) What must the one-year and two-year forward exchange rates be to prevent any arbitrage? (3 marks)
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Venture Capital Valuation
Authors: Lorenzo Carver
1st Edition
0470908289, 978-0470908280
