Question

The one-year interest rate in New Zealand is 8%. The one-year UK interest rate is 10%. The spot rate of the New Zealand dollar (NZ$) is £0.25. The forward rate of the New Zealand dollar is £0.27. What is the retum tor a UK livestoe investing £100?

a. £4.48
a. £6.64
a. £5.56
a. £4.56

Answer 1

Step-by-step explanation:

To calculate the return for a UK investor investing £100, we need to first calculate the expected future value of the investment in NZD. We can use the formula:

FV = PV * (1 + r)^n

Where FV is the future value, PV is the present value, r is the interest rate, and n is the number of periods.

Using this formula with the given values, we get:

FV = £100 * (1 + 0.10) = £110

Next, we need to convert the future value from GBP to NZD using the spot rate and the forward rate. We can use the formula:

FV(NZD) = FV(GBP) * forward rate / spot rate

Using this formula with the given values, we get:

FV(NZD) = £110 * £0.27 / £0.25 = NZD118.80

Finally, we need to calculate the return in NZD by subtracting the initial investment from the future value and converting back to GBP using the spot rate. We can use the formula:

Return = (FV(NZD) - PV(NZD)) / spot rate

Using this formula with the given values, we get:

Return = (NZD118.80 - NZD100) / £0.25 = £7.52

So the return for a UK investor investing £100 is £7.52.