Baylor Bank believes the New Zealand dollar (N.Z $) will change in its value ove

Question

Baylor Bank believes the New Zealand dollar (N.Z $) will change in its value over the next 5 days from $0.50 to $0.48. The following annual interest rates apply:
Lending Rate for U.S.$ : 7.10%
Borrowing Rate for U.S.$ : 7.50%
Lending Rate for N.Z $ : 6.80%
Borrowing Rate for N.Z $ : 7.25%

Baylor Bank has the capacity to borrow either $5 million or equivalent $ amount at the current spot rate. Baylor Bank desires to make a speculative gain based on its forecast and the current interest rates.

In order to make speculative gain, the bank borrows in one currency and lends in other currency? what will its dollar profit be from speculation over the five-day period? Use 360 days in a year.
Answer
$ 208,044
$208,321
$200,097
$221,325

Explanation / Answer

Borrow $5 million. 2. Convert to NZ$: $5,000,000/$.48 = NZ$10,416,667. 3. Invest the NZ$ at an annualized rate of 6.80% over five days. NZ$10,416,667 x [1 + 6.80% (5/360)] = NZ$10,426,505 4. Convert the NZ$ back to dollars: NZ$10,426,505 x $.50 = $5,213,252 5. Repay the dollars borrowed. The repayment amount is: $5,000,000 x [1 + 7.5% (5/360)] = $5,000,000 x [1.00104] = $5,005,208 6. After repaying the loan, the remaining dollar profit is: $5,213,252 - $5,005,208 = $208,044

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