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Instructions: Show all calculations in detail. No partial credit will be given for just answers. (Please...

Instructions: Show all calculations in detail. No partial credit will be given for just answers. (Please show all calculations step-by-step)

  1. Assume the following information:

      U.S. deposit rate for 1 year                      =   11%

      U.S. borrowing rate for 1 year                  =   12%

      New Zealand deposit rate for 1 year        =     8%

      New Zealand borrowing rate for 1 year =   10%

      New Zealand dollar forward rate for 1 year = $.40/NZ$

      New Zealand dollar spot rate                   =      $.39/NZ$

      Also assume that a U.S. exporter denominates its New Zealand exports in NZ$ and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm.

Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge?

     

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Answer:

We will Borrow in New Zealand Amount equivalent to NZ600,000 in future which is

= 600,000 / 1.1 = NZ$ 545,454.55

Now we have to deposit this amount in US for a spot rate of $.39/NZ$

=> 545454.55 *.39 = 212727.27

Now we calculate the,value of this investment after 1 year = 212727.27 (1+.11) = 236,127.27

=> Approx.Value of export in US$ = $236127.27

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