Question

Baylor Bank believes the New Zealand dollar will depreciated over the next 15 days from $.93 to $.87. The following annual interest rates apply: Currency Lending Rate Borrowing Rate Dollars 3.00% 4.80% New Zealand dollar (NZ$) 4.40% 5.00% Baylor Bank has the capacity to borrow either NZ$12 million or $6 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the 15 days period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

Answer 1

Borrow $6 million

Convert to NZ$ = $6,000,000/$.93 = NZ$6,451,612.9

Invest the NZ$ at an annualized rate of 4.40% over 15 days.

NZ$6,451,612.9 × [1 + 4.40% (15/360)] = NZ$6,463,440.8.

Convert the NZ$ back to dollars = NZ$6,463,440.8 × $.87 = $5,623,193.5

Repay the dollars borrowed. The repayment amount is

$6,000,000 × [1 + 4.8% (15/360)] = $5,000,000 × 1.00199= $5,009,999.9

After repaying the loan, the remaining dollar profit is

$5,623,193.5 – $5,009,999.9 = $613,193.6