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

\$1.49 Excluding Tax

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#### Specs

SKU: AT-1682 Categories: ,

## Description

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 â€“ 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) â€“ (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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