Suppose that the one-year interest rate in Australia is 7.66% p.a. and in New Zealand, it is 8.63% p.a. Suppose also that the current spot rate is EAUD/NZD=1.1578 and the current 12-month forward rate is FAUD/NZD=1.046. Assuming there are no transaction costs, which of the following is true? Selected Answer: Answers: C. An arbitrager can make a profit of 0.0186 AUD for every AUD he borrows to invest in NZD assets. A. An arbitrager can make a profit of 0.1054 AUD for every AUD he borrows to invest in NZD assets. B. An arbitrager can make a profit of 0.1054 NZD for every NZD he borrows to invest in AUD assets. C. An arbitrager can make a profit of 0.0186 AUD for every AUD he borrows to invest in NZD assets. D. An arbitrager can make a profit of 0.0186 NZD for every NZD he borrows to invest in AUD assets. E. An arbitrager cannot profit in this scenario as covered interest parity holds
Suppose that the one-year interest rate in Australia is 7.66% p.a. and in New Zealand, it is 8.63% p.a. Suppose also that the current spot rate is EAUD/NZD=1.1578 and the current 12-month forward rate is FAUD/NZD=1.046. Assuming there are no transaction costs, which of the following is true? Selected Answer: Answers: C. An arbitrager can make a profit of 0.0186 AUD for every AUD he borrows to invest in NZD assets. A. An arbitrager can make a profit of 0.1054 AUD for every AUD he borrows to invest in NZD assets. B. An arbitrager can make a profit of 0.1054 NZD for every NZD he borrows to invest in AUD assets. C. An arbitrager can make a profit of 0.0186 AUD for every AUD he borrows to invest in NZD assets. D. An arbitrager can make a profit of 0.0186 NZD for every NZD he borrows to invest in AUD assets. E. An arbitrager cannot profit in this scenario as covered interest parity holds
Chapter17: Capital And Time
Section: Chapter Questions
Problem 17.7P
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