Question
You see the following rates for NZD (New Zealand dollars) versus AUD (Australian dollars) in the market. The spot exchange rate (NZD per AUD) is
You see the following rates for NZD (New Zealand dollars) versus AUD (Australian dollars) in the market.
The spot exchange rate (NZD per AUD) is 1.1000.
The six month NZD interest-rate is 6%.
The six month AUD interest-rate is 4%.
The six month market forward (NZD per AUD) is 1.1125 - 1.113. (There is a bid-ask spread in the market forward but no bid-ask spread in the spot market).
Assume that six months is exactly 0.5 year. Suppose that you are allowed to borrow 1 million NZD, how much arbitrage profit can you make? Give your answer to the nearest NZD.
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