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2. Baylor Bank believes the New Zealand dollar will appreciated over the next 15 days from...

2. Baylor Bank believes the New Zealand dollar will appreciated over the next 15 days from $.90 to $.93. The following annual interest rates apply:

Currency

Lending Rate

Borrowing Rate

Dollars

4.50%

6.50%

New Zealand dollar (NZ$)

6.40%

8.00%

Baylor Bank has the capacity to borrow either NZ$10 million or $9 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the 15 days period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

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Expert Solution

Baylor Bank believes the New Zealand dollar will appreciated over the next 15 days from $.90 to $.93

Hence, it will borrow $9 million @ 6.50% to buy $9million/$.90= NZ$10 million.

Interest Paid By  Baylor= $9000000*0.065*15/365=$24041.1

Invest in New Zealans @6.40%=NZ$(10 million*0.064*15/365+10 million)=NZ$10026301.37

Expected earnings of Baylor Bank= $[(NZ$10026301.37*0.93)-9000000]-24041.1=$300419.17.


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