Required: Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in the New Zealand dollar for one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided below for the period 2000 - 2009. Note that interest rates are one-year interbank rates on January 1st each year, and that the exchange rate is the amount of New Zealand dollar per U.S. dollar on December 31 each year. The exchange rate was NZ$1.9102 per $ on January 1, 2000. Fill out columns (4) - (7) and compute the total dollar profits from this carry trade over the ten-year period. Also, assess the validity of uncovered interest rate parity based on your solution of this problem. You are encouraged to use the Excel spreadsheet software to tackle this problem. Note: Negative value should be entered with a minus sign. Enter profit value answers in dollars, rather than in millions of dollars. Do not round intermediate calculations. Round interest rate spread, rate of appreciation, and difference between the two to 2 decimal places. Round profit values to nearest dollar value. Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 İNZ$(%) 6.67 6.84 5.05 6.08 6.02 6.81 7.42 8.17 9.24 5.24 iş (%) 6.57 6.07 2.51 1.52 1.53 3.17 4.91 5.40 4.29 2.07 SNZ$I$ 2.2613 2.4029 1.9131 1.5244 1.3859 1.4696 1.4196 1.3008 1.7126 1.3756 İNZ$ - is eNZ$/$ (4) - (5) $ Profit
Required: Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in the New Zealand dollar for one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided below for the period 2000 - 2009. Note that interest rates are one-year interbank rates on January 1st each year, and that the exchange rate is the amount of New Zealand dollar per U.S. dollar on December 31 each year. The exchange rate was NZ$1.9102 per $ on January 1, 2000. Fill out columns (4) - (7) and compute the total dollar profits from this carry trade over the ten-year period. Also, assess the validity of uncovered interest rate parity based on your solution of this problem. You are encouraged to use the Excel spreadsheet software to tackle this problem. Note: Negative value should be entered with a minus sign. Enter profit value answers in dollars, rather than in millions of dollars. Do not round intermediate calculations. Round interest rate spread, rate of appreciation, and difference between the two to 2 decimal places. Round profit values to nearest dollar value. Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 İNZ$(%) 6.67 6.84 5.05 6.08 6.02 6.81 7.42 8.17 9.24 5.24 iş (%) 6.57 6.07 2.51 1.52 1.53 3.17 4.91 5.40 4.29 2.07 SNZ$I$ 2.2613 2.4029 1.9131 1.5244 1.3859 1.4696 1.4196 1.3008 1.7126 1.3756 İNZ$ - is eNZ$/$ (4) - (5) $ Profit
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 57QA
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Transcribed Image Text:Required:
Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in the New Zealand dollar for
one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided below
for the period 2000 - 2009. Note that interest rates are one-year interbank rates on January 1st each year, and that the exchange rate
is the amount of New Zealand dollar per U.S. dollar on December 31 each year. The exchange rate was NZ$1.9102 per $ on January 1,
2000. Fill out columns (4) — (7) and compute the total dollar profits from this carry trade over the ten-year period. Also, assess the
validity of uncovered interest rate parity based on your solution of this problem. You are encouraged to use the Excel spreadsheet
software to tackle this problem.
Note: Negative value should be entered with a minus sign. Enter profit value answers in dollars, rather than in millions of dollars.
Do not round intermediate calculations. Round interest rate spread, rate of appreciation, and difference between the two to 2
decimal places. Round profit values to nearest dollar value.
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
İNZ$(%)
6.67
6.84
5.05
6.08
6.02
6.81
7.42
8.17
9.24
5.24
iş (%)
6.57
6.07
2.51
1.52
1.53
3.17
4.91
5.40
4.29
2.07
SNZ$I$
2.2613
2.4029
1.9131
1.5244
1.3859
1.4696
1.4196
1.3008
1.7126
1.3756
İNZ$ - is
eNZ$/$
(4) - (5)
$ Profit
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