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

Question

15. 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, the bank borrows in one currency and lends in other currency? What is the total interest the bank would would pay in the currency in which it borrows? Use 360 days in a year.
Answer
A. N.Z. $ 10,069
B. $ 5208
C. $ 4930
D. N.Z $ 10,489

Explanation / Answer

A. N.Z. $ 10,069 If the bank borrows in NZ$ then it will pay interest after 5 days= 10mx7.25x5/(360x100)= NZ$10069 Suppose the bank converts 10m NZ$ into S today it will be 10mx.5= $5000000 bank borrows $5000000, it will pay int= 5000000x7.5x5/(360x100)= $5208.33 Converting it to NZ$ 5208.33/.48= NZ$10850.69 Therefore the bank will borrow in Nz$ since it will have to pay a lesser interest, interest being N.Z. $ 10,069

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