Question

Suppose that Denver Financial Co. expects the exchange rate of the New Zealand dollar (NZ$) to appreciate from its current level of 0.5 to 0.55 in 30 days. Denver Financial seeks to capitalize on this potential opportunity.

Suppose that Denver Financial begins by borrowing $30,000,000 and converting it to New Zealand dollars (NZ$).

The following table shows the short-term interest rates (annualized) in the interbank market.

Currency	Lending Rate	Borrowing rate
	(Adjusted for 30-day period)	(Adjusted for 30-day period)
U.S. Dollars	6.62%	7.10%
New Zealand Dollars (NZ$)	6.38%	6.86%

After exchanging $30,000,000 for New Zealand dollars, Denver Financial will have NZ $_______ (New Zealand dollars).

a.) $60,000,000

b.) $42,000,000

c.)$48,000,000

d.)54,000,000

Answer 1

Spot rate, 1 NZD = $0.5

Hence, $30,000,000 = 30,000,000/0.5

= NZD 60,000,000

Hence, the answer is a.