Question

Assume the U.S. interest rate is 7.5 percent, the New Zealand interest rate is 6.5 percent, the spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?

Answer 1

about −1.7%

Step-by-step explanation:

% change in pound

=$0.48-$0.52/0.52

=-0.04/0.52

=-7.7%

Effective financing rate =

(1 + 6.5%)[1 + (−7.7%)] − 1

= about −1.7%

Therefore the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan is about -1.7%