Question

Assume the following information: Current spot rate of New Zealand dollar = $.41 Forecasted spot rate of New Zealand dollar 1 year from now = $.45 One-year forward rate of the New Zealand dollar = $.42 Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9% Given the information in this question, the return from uncovered interest arbitrage by U.S. investors with $400,000 to invest is _______ A) about 11.97 B) about 10.63 C) about 11.12 D) about 13.27 E) about 18.54

Answer 1

B) about 10.63

Step-by-step explanation:

Calculation to determine what return from uncovered interest arbitrage by U.S. investors with $400,000 to invest is

First step is to calculate the Current Amount of New Zealand dollar

New Zealand dollar=$400,000/$.41

New Zealand dollar=$975,609.76

Second step is to calculate the Increase based on the Annual interest rate on New Zealand dollars

Increase in New Zealand dollars = $975,609.76×(1+.08)

Increase in New Zealand dollars = $975,609.76× (1.08)

Increase in New Zealand dollars=$1,053,658.54

Third step is to calculate the forward rate amount of the New Zealand dollar

Forward rate amount of New Zealand dollar = $1,053,658.54× .42

Forward rate amount of New Zealand dollar= $442,536.63

Now let calculate return from uncovered interest arbitrage

Return = ($442,536.63 –$400,000)/$400,000

Return = $42,536.63/$400,000

Return=0.1063*100

Return= 10.63%

Therefore return from uncovered interest arbitrage by U.S. investors with $400,000 to invest is about 10.63 %