Question

Chicago Bank expects the exchange rate of the New Zealand dollar (NZ\$) to appreciate from its...

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%

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

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