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How much arbitrage profit would get in the us denomination

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You observe the following exchange rates and interest rates: Spot rate = $0.67/NZ$, one-year forward exchange rate = $0.64/NZ$, one-year interest in the United States = 0.5%, and one-year interest in New Zealand = 1.5%.

Suppose you have the capacity of borrowing up to $1,000,000 or an equivalent amount in New Zealand dollars.

Question 1: Determine if IRP is holding between New Zealand and the United States. If not, explain in detail how you would realize certain profit in U.S. dollar terms. How much arbitrage profit would you get in the US$ denomination?

Question 2: Explain how IRP will be restored as a result of the above arbitrage transactions that you and many other arbitrageurs carry out.

Reference no: EM132913794

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