Question

v The New Zealand interest rate is 1.10%, and the Australian interest rate is 2.50%, both...

v

The New Zealand interest rate is 1.10%, and the Australian interest rate is 2.50%, both with continuous compounding. The exchange rate is 1 AUD = 0.9800 NZD. You are offered a 3 year forward contract where you pay 0.8897 NZD for 1 AUD. What is the arbitrage opportunity?

Borrow Australian dollars, invest in NZ dollars, close out with a long forward.

Borrow NZ dollars, invest in Australian dollars, close out with a long forward.

Borrow NZ dollars, invest in Australian dollars, close out with a short forward.

Borrow Australian dollars, invest in NZ dollars, close out with a short forward.

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
An Australian company is considering making a foreign capital expenditure in New Zealand. The cost of...
An Australian company is considering making a foreign capital expenditure in New Zealand. The cost of the project is NZD 1m and it is expected to generate cash flows of NZD 350,000, NZD 300,000 and NZD 650,000 over three years. The inflation rate in New Zealand is 3.2%pa and the inflation rate in Australia is 4.1%pa. The inflation rates are forecasted to be unchanged over the investment horizon. The firm's cost of capital in Australian dollars is 12.5%. The current...
What will happen if the following exchange rates (involving the Australian dollar, the New Zealand dollar...
What will happen if the following exchange rates (involving the Australian dollar, the New Zealand dollar and the Hong Kong dollar) are quoted in Sydney, Wellington and Hong Kong?(5) HKD/AUD 5.9809 NZD/AUD 1.1162 HKD/NZD 5.3860 Is there any arbitrage opportunity in the market? If yes, what is your net profit if you have 1 unit of domestic currency?
One-year interest rates are currently at 9% for New Zealand and 4% for Australia. The spot...
One-year interest rates are currently at 9% for New Zealand and 4% for Australia. The spot rate is A$0.88/NZ$, while the 1-year forward rate is A$0.88/NZ$. Which of the following correctly describes a profitable arbitrage opportunity? A. An Australian investor invests in New Zealand securities while agreeing to sell AU$ forward. B. An Australian investor invests in New Zealand securities while agreeing to sell NZ$ forward. C. A New Zealand investor invests in Australian securities while agreeing to sell NZ$...
1. New Zealand Company WoolSmith is buying an Australian ranch and wants to borrow 30M in...
1. New Zealand Company WoolSmith is buying an Australian ranch and wants to borrow 30M in the AUD fixed interest rate market to pay for it over three years. Australian Company TinCo is buying a New Zealand mine for 37.5M NZDs and wants to borrow this amount in the NZD fixed rate market for three years. The spot exchange rate is .80 AUDs per NZD (or 1.25 NZDs per AUD). The borrowing terms confronted by each company are below. Each...
Chicago Bank expects the exchange rate of the New Zealand dollar (NZ$) 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%
a2 Milk Ltd Pty. a2 Milk is an Australian company specialising in producing fresh milk and...
a2 Milk Ltd Pty. a2 Milk is an Australian company specialising in producing fresh milk and milk formula. The company has its operations in Australia. Therefore, there expenses are generally invoiced in Australian dollars (AUD). However, it has recently imported supplies from New Zealand, and the bill is invoiced in the New Zealand dollars (NZD) for NZD 1,500,000, payable in 6 months’ time. Suppose a2 Milk’s management is concerned about foreign exchange rate exposure, and would like to hedge this...
a2 Milk Ltd Pty. a2 Milk is an Australian company specialising in producing fresh milk and...
a2 Milk Ltd Pty. a2 Milk is an Australian company specialising in producing fresh milk and milk formula. The company has its operations in Australia. Therefore, there expenses are generally invoiced in Australian dollars (AUD). However, it has recently imported supplies from New Zealand, and the bill is invoiced in the New Zealand dollars (NZD) for NZD 1,500,000, payable in 6 months’ time. Suppose a2 Milk’s management is concerned about foreign exchange rate exposure, and would like to hedge this...
Question 3 Consider a five-year currency and interest rate swap, whereby A receives annual payments on...
Question 3 Consider a five-year currency and interest rate swap, whereby A receives annual payments on Australian dollars and based on a floating interest rate, and B receives annual payments on New Zealand dollars based on a fixed interest rate. The notional involved is AUD100000, the fixed rate is 6 per cent, and he contracted exchange rate is 1.18 (NZD/AUD). If on each payment date, the floating interest rate assumes the values 8.25, 9.75, 5.50, 4.75 and 6 per cent,...
National Bank quotes the following for the British pound and the New Zealand dollar:​ ​ Quoted...
National Bank quotes the following for the British pound and the New Zealand dollar:​ ​ Quoted Bid Price Quoted Ask Price Value of a British pound (£) in $ $1.61 $1.62 Value of a New Zealand dollar (NZ$) in $ $.55 $.56 Value of a British pound in ​ ​ New Zealand dollars NZ$2.95 NZ$2.96 Equilibrium cross-exchange rate                                   NZ$2.875                        NZ$2.945 Assume you have $100,000 to conduct triangular arbitrage. Show step by step what transactions you will make and what is...
Suppose the 6-month risk free spot rate in HKD is 1% continuously compounded, and the 6-month...
Suppose the 6-month risk free spot rate in HKD is 1% continuously compounded, and the 6-month risk free rate in NZD is 3% continuously compounded. The current exchange rate is 5 HKD/NZD. a. Suppose again that our usual assumptions hold, i.e., no constraints or other frictions. Suppose you can enter a forward contract to buy or sell NZD 1 for HKD 5. Is there an arbitrage? If yes, describe an arbitrage strategy. If no, briefly explain why not. b. Suppose...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT