Question

Baylor Bank believes the New Zealand dollar will depreciate over the next 30 days from $0.53/NZD to $0.50/NZD. The following annual interest rates apply: Currency Lending Rate Borrowing Rate Dollars 6.20% 6.60% New Zealand dollar (NZD) 5.90% 6.35% Baylor Bank has the capacity to borrow either NZD 20 million or $10 million. If Baylor Bank’s forecast if correct, what will be its dollar profit from speculation over the 30‑day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectation)? Make sure to show your work step by step.

Answer 1

Step 1 Borrow $10 million at the rate of 6.60%.

Step 2 Converting the $10million into NZD using the rate spot rate $.53/NZD getting

  = 10000000/.53

= 18867924.53 NZD

Step 3 Invest the NZD at an annualized rate of 5.90% over the period of 30 days getting

Future Value = Present Value * (1+ Borrowing Rate (Number of days/360))

= 18867924.53 * (1+5.90% (30/360)

= 18867924.53 * (1+0.0.59(30/360))

= 18867924.53* 1.0049

= NZD 18960691.29

Step 4 Convert the NZD back to Dollar using the rate $.50/NZD getting

= 18960691.29* .50

= $ 9480345.6

Step 5 Repayment of Dollar Borrowed 10Million after 30 days at interest rate of 6.6%

= Future Value = Present Value * (1+ Borrowing Rate (Number of days/360))

= 10000000* (1+6.6% (30/360))

= 10000000*(1+0.066(30/360))

= 10000000*1.0055

= $ 10055000

Step 6 Speculation Profit = 10055000 - 9480345.6

= $ 574654.4

Note Assume 360 days in a year.