Baylor Bank believes the New Zealand dollar will depreciated over the next 30 da

Question

Baylor Bank believes the New Zealand dollar will depreciated over the next 30 days from $.86 to $.82. The following annual interest rates apply:

Currency

Lending Rate

Borrowing Rate

Dollars

6.00%

7.80%

New Zealand dollar (NZ$)

6.67%

8.00%

Baylor Bank has the capacity to borrow either NZ$12 million or $10 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the 30 days period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

Currency

Lending Rate

Borrowing Rate

Dollars

6.00%

7.80%

New Zealand dollar (NZ$)

6.67%

8.00%

Explanation / Answer

Baylor Bank can borrow$ 10 million Converting to NZ$ = 10000000/0.86 Invest NZ$ 11627907 for 6.67% for 30 days 11627907 *(1+6.67%(30/360)) 11627907*1.005558 NZ$ 11692539 Conversion of NZs back to dollars 11692539*0.82 9587882 Repay the dollar loan taken 10000000*(1+7.80%(30/360)) 10000000*1.0065 10065000 Dollar Profit/Loss = 9587882-10065000 -477118

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