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 NZ$10 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, what move should this bank undertake?
Answer
Borrow N.Z.$ and lend $
Borrow $ and lend $
Borrow N.Z.$ and lend N.Z.$
Borrow $ and lend N.Z.$

Explanation / Answer

Borrow $ and lend $

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