Provo expects that the spot rate of the nz$

Assignment Help Basic Statistics

Reference no: EM131042830

Provo Co. has $15 million that it will not need until 1 year from now. It can invest the funds in U.S. dollar-denominated securities and earn 6 percent or in New Zealand dollars (NZ$) at 11 percent. It has no other cash flows in New Zealand dollars. Assume that interest rate parity holds, so the 1-year forward rate of the NZ$ exhibits a discount in this case. Provo expects that the spot rate of the NZ$ will depreciate but not as much as suggested by the 1-year forward rate of the NZ$.

a. Should Provo consider investing in NZ$ and simultaneously selling NZ$ 1 year forward to cover its position? Explain.

b. If Provo invests in NZ$ without covering this position, is the effective yield expected to be above, below, or equal to the U.S. interest rate of 6 percent? Is the effective yield expected to be above, below, or equal to the New Zealand interest rate of 11 percent?

c. Explain the implications if Provo invests in NZ$ without covering its position and the future spot rate of the NZ$ in 1 year turns out to be lower than today's 1-year forward rate on the NZ$.

Reference no: EM131042830

Questions Cloud

Resistance to adopting the new systems : Discussion how new systems development can change the order of those who control the information and how this disruption may lead to resistance to adopting the new systems.

Go to the market data section : Go to the Market Data section and then to Rates & Bonds, and you can click on a country to review its interest rates. Review the 1-year yields of currencies. Assume that you could invest at the quoted yield for each currency. Which currency would ..

Identify and explain the key areas of the policy : BULAW3731 Income Tax Law & Practice Assignment. This year in Australia there will be a federal election, and tax reform is currently a topic of debate. Identify and explain the key areas of the Policy, then evaluate whether it exhibits the features ..

Feature of organizational culture : Modern organizations have been trying to create a corporate culture with a distinct identity by moulding the behaviours of their members. Which of the following is not a feature of organizational culture?

Provo expects that the spot rate of the nz$ : Provo Co. has $15 million that it will not need until 1 year from now. It can invest the funds in U.S. dollar-denominated securities and earn 6 percent or in New Zealand dollars (NZ$) at 11 percent.

Describe the political dimensions of your project : Identify stakeholders and clients - Identify the perspectives and perceptions of the different stakeholders and clients and Describe the political dimensions of your project

How project management reduce politics projects : Addresses the conditions under which systems development becomes confused with a range of other organizational problems, where the results can be less-than-optimal combinations of social and technical systems.

What is the source of many career shoulds : Lindsey Pollak gives you three "networking event no-nos" to nix. Which of the following faux pas was NOT on her list (even though it's not a good idea to do it either!):

Who achieves the higher net income margin : What are their respective 3-year trends for days of inventory?

User Account

All Pages