The following information is available: Spot exchange rate (NZD/AUD) 1.0000 6-month forward exchange rate (NZD/AUD) 1.0070...

Transcribed Image Text:

The following information is available: Spot exchange rate (NZD/AUD) 1.0000 6-month forward exchange rate (NZD/AUD) 1.0070 6-month interest rate in New Zealand 2.0% per annum 6-month interest rate in Australia 1.0% per annum (1) Does Covered Interest Rate Parity (CIP) hold? (ii) If CIP does not hold, clearly outline the steps a trader would follow in order to make arbitrage profits and calculate the profit assuming the trader has access to NZD 1,000,000 or AUD 1,000,000. (iii) Assume that the expected inflation rate in New Zealand over the next 6 months is 1.0%, if the Purchasing Power Parity (PPP), Uncovered Interest Parity (UIP) and Real Interest Parity hold, what will you expect the inflation rate in Australia to be over the next 6 months? The following information is available: Spot exchange rate (NZD/AUD) 1.0000 6-month forward exchange rate (NZD/AUD) 1.0070 6-month interest rate in New Zealand 2.0% per annum 6-month interest rate in Australia 1.0% per annum (1) Does Covered Interest Rate Parity (CIP) hold? (ii) If CIP does not hold, clearly outline the steps a trader would follow in order to make arbitrage profits and calculate the profit assuming the trader has access to NZD 1,000,000 or AUD 1,000,000. (iii) Assume that the expected inflation rate in New Zealand over the next 6 months is 1.0%, if the Purchasing Power Parity (PPP), Uncovered Interest Parity (UIP) and Real Interest Parity hold, what will you expect the inflation rate in Australia to be over the next 6 months?

Answer rating: 100% (QA)

The detailed ... View the full answer