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 $___________ (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 $___________ (New Zealand dollars).

Fill in the blank.

Answer choices for the first blank.........(33,195,250, or 36,213,000, or 30,177,500, or 39,230,750)

Answer choices for the first blank..........(38,407,727.27, or 54,868,181.82, or 49,381,363.64, or 43,894,545.46)

Answer 1

Denver Financial Co.' s loan amount = $30,000,000

The annualized interest rate at which Denver Financial Co. borrows = 30-day borrowing rate in US Dollars

= 7.1%

The 30 day interest rate at which Denver Financial Co. borrows = annualized rate /12

= 7.1% /12

= 0.5917%

Total Loan Amount to be repaid in US Dollars = Loan Amount in USD X (1+30 day interest rate)

= $30,000,000 X (1+0.5917%)

= $30,177,500

Answer for first blank is $30,177,500

NZ$ to USD exchange rate after 30 days = 0.55

Hencem, the value of loan amount in NZ$ = Loan amount in USD / 30 day exchange rate

= $30,177,500 / 0.55

= $54,868,181.82

Answer for second blank is $54,868,181.82