Question

Chicago Bank expects the exchange rate of the New Zealand dollar (NZ$) to appreciate from its present level of $.50 to $.55 in 30 days.

Chicago Bank is able to borrow $20 million NZD on a short-term basis from other banks. How you can earn profit and how much?

Currency Lending rate Borrowing Rate

U.S Dollar 6.72% 7.20%

New Zealand Dollars(NZ$) 6.48% 6.96%

Answer 1

Step:1 Amount Borrowed = 20Mil NZD

Step 2: Convert the 20 Mil NZD to US $ using Spot Rate

1 NZS = $0.50

20 Mill NZD = $10 Mill

Step 3: Deposit the $10 Mill in Chicago bank for 1 month at 6.72%

Step 4: Withdraw the deposit along with interest

$10Mill(1+0.0672*1/12) = $10.056 Mill

Step 5: Repayment amount of borrowing made in Step 1 = 20millNZD(1+0.0696*1/12) = 20.116Mill NZD

Step 6: AMount required to pay 20.116 mill NZD

1NZD = $0.55

20.116Mill NZD = $11.0638 Mill

Step 7: AMount of outflow = step 6- step 4 = 11.0638-10.056 = 1.0078Mill(Loss)

So it is not feasible to borrow 20Mill NZD at the prevailing interest rates

Note: Least interest rates were considered as Deposit rated and highest interest rates were considered as Borrowing rates accordingly as per general scenario