Required: Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in the New Zealand dollar for one year. One-year interest rates and the exchange rate between the US dollar ($) 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$1.9092 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 is(%) SNZSS NZSS NZ$I$ (4)-(5) $ Profit 2000 6.57 6.52 2.2603 2001 6.74 6.02 2.4019 2002 4.95 2.46 1.9121 2003 5.98 1.47 1.5234 2004 5.92 1.48 1.3849 2005 6.71 3.12 1.4686 2006 7.32 4.86 1.4186 2007 8.07 5.35 1.2998 2008 9.14 4.24 1.7116 2009 5.14 2.02 1.3746
Required: Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in the New Zealand dollar for one year. One-year interest rates and the exchange rate between the US dollar ($) 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$1.9092 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 is(%) SNZSS NZSS NZ$I$ (4)-(5) $ Profit 2000 6.57 6.52 2.2603 2001 6.74 6.02 2.4019 2002 4.95 2.46 1.9121 2003 5.98 1.47 1.5234 2004 5.92 1.48 1.3849 2005 6.71 3.12 1.4686 2006 7.32 4.86 1.4186 2007 8.07 5.35 1.2998 2008 9.14 4.24 1.7116 2009 5.14 2.02 1.3746
Chapter22: International Financial Management
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:Required:
Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in the New Zealand dollar for
one year. One-year interest rates and the exchange rate between the US dollar ($) 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$1.9092 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
is(%)
SNZSS
NZSS
NZ$I$
(4)-(5)
$ Profit
2000
6.57
6.52
2.2603
2001
6.74
6.02
2.4019
2002
4.95
2.46
1.9121
2003
5.98
1.47
1.5234
2004
5.92
1.48
1.3849
2005
6.71
3.12
1.4686
2006
7.32
4.86
1.4186
2007
8.07
5.35
1.2998
2008
9.14
4.24
1.7116
2009
5.14
2.02
1.3746
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