Covered interest arbitrage. Assume information: a) the following Current spot rate of New Zealand dollar =...

  

Transcribed Image Text:

Covered interest arbitrage. Assume information: a) the following Current spot rate of New Zealand dollar = $.41 Forward rate of New Zealand dollar for 360-day (1 year) delivery = $.43 Annual interest rate on New Zealand dollars Annual interest rate on U.S. dollars = 8% = 9% Given the information in this question, what is the return, in terms of dollars, on the domestic ($) deposit? b) What is the return, in terms of dollars, lars, on the covered foreign (NZ$) deposit? c) Given your answers in (a) and (b) above, does the covered interest rate parity condition hold true? Yes, no, and why? If not, how would you borrow and lend in order to take advantage of the arbitrage situation and what would the arbitrage profit (%) be? In the case that the covered interest arbitrage condition does not hold, describe the dynamic adjustment in the foreign exchange and money markets. I Covered interest arbitrage. Assume information: a) the following Current spot rate of New Zealand dollar = $.41 Forward rate of New Zealand dollar for 360-day (1 year) delivery = $.43 Annual interest rate on New Zealand dollars Annual interest rate on U.S. dollars = 8% = 9% Given the information in this question, what is the return, in terms of dollars, on the domestic ($) deposit? b) What is the return, in terms of dollars, lars, on the covered foreign (NZ$) deposit? c) Given your answers in (a) and (b) above, does the covered interest rate parity condition hold true? Yes, no, and why? If not, how would you borrow and lend in order to take advantage of the arbitrage situation and what would the arbitrage profit (%) be? In the case that the covered interest arbitrage condition does not hold, describe the dynamic adjustment in the foreign exchange and money markets. I

Answer rating: 100% (QA)

To determine the returns and assess the covered interest rate parity condition we will follow the given information a Return on the domestic deposit T... View the full answer