Reference no: EM133075320
The following market quotes are available:
Spot rate A$ 0.93 per NZ$
Forecasted spot rate one year from now A$ 0.94 per NZ$
One-year forward rate A$ 0.95 per NZ$
One-year interest rate in Australia 2.5% per year
One-year interest rate in the New Zealand 3.5% per year
a).Calculate the one-year forward premium or discount on the Australian dollar. Show your calculations.
b).What would be a profitable strategy - borrow New Zealand dollars and invest in Australian dollars or borrow Australian dollars and invest in New Zealand dollars? Show your calculations to justify your answer.
c) Assume the trader can borrow NZ$1,000,000 or A$1,000,000. How much profit from covered interest arbitrage can the trader make? Show your calculations.
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