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 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 receive in the currency in which it lends? Use 360 days in a year. Answer a.$ 4,931 $ 4,733 N.Z $ 9,444 N.Z. $ 9838

Explanation / Answer

Borrow NZ$ 10000000 Interest will be = NZ$ 10000000 * (1+7.25%/360)^5 - 10000000 = NZ$10073 Converted to US$, lend it, and coverted back to NZ$, these will generate a revenue = NZ$ 10000000 * 0.5 *(1+7.10%/360)^5 / 0.48 - NZ$ 10000000 = NZ$ 426942.71 which is more than the borrowing interest. (speculative gain) The lending interest = $ 5000000*(1+7.10%/360)^5 - $5000000 = $ 4931 I am sure of this!!

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