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%

Suppose that Denver Financial’s initial loan of $30,000,000 must be repaid with a rate of 0.0059 after 30-days.

Hint: Assume 360 days in a year.

Thus, at the end of 30-days, Denver Financial must repay a total of $(33,195,250, or 36,213,000, or 30,177,500, or 39,230,750) (U.S. dollars) from the initial loan. In New Zealand dollars, at the new predicted 0.55 spot rate, this repayment would be equivalent to NZ $(38,407,727.27, or 54,868,181.82, or 49,381,363.64, or 43,894,545.46) (New Zealand dollars).

The bold are the option choices and could you please explain, thank you.

Answer 1

Given,

Amount borrowed in $= 30,000,000

Borrowing rate in $= 7.1%

Therefore, Interest for 30 days= 30,000,000*7.1%*30/360 = $177,500

Amount to be repaid after 30 days= $30,000,000 + $177,500 = $30,177,500

Also given,

Exchange rate after 30 days= 0.55 N$ per US$

Therefore, equivalent of amount to be repaid = 30,177,500/0.55 =   NZ $ 54,868,181.82