Suppose you conduct currency carry trade by borrowing $1 million at the start

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SKU: AT-1682 Categories: , Tags: , , ,

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QUESTION:

Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in New Zealand dollars for one year. One-year interest rates and the exchange rate between the U.S. dollar ($) 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$1.9088/$ on January 1, 2000. Fill out the 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 to this problem. You are encouraged to use the Excel program to tackle this problem.

(1) (2) (3) (4) (5) (6) (7)
Year iNZ$ i$ SNZ$/$ iNZ$ i$ eNZ$/$ (4)-(5) $ Profit
2000 6.53 6.50 2.2599
2001 6.70 6.00 2.4015
2002 4.91 2.44 1.9117
2003 5.94 1.45 1.5230
2004 5.88 1.46 1.3845
2005 6.67 3.10 1.4682
2006 7.28 4.84 1.4182
2007 8.03 5.33 1.2994
2008 9.10 4.22 1.7112
2009 5.10 2.00 1.3742

 

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