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$1.9090 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 İNZ$(%) is(%) SNZ$I$ INZ$ - is eNZ$/$ (4)-(5) $ Profit 2000 6.55 6.51 2.2601 2001 6.72 6.01 2.4017 2002 4.93 2.45 1.9119 2003 5.96 1.46 1.5232 2004 5.90 1.47 1.3847 2005 6.69 3.11 1.4684 2006 7.30 4.85 1.4184 2007 8.05 5.34 1.2996 2008 9.12 4.23 1.7114 2009 5.12 2.01 1.3744
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$1.9090 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 İNZ$(%) is(%) SNZ$I$ INZ$ - is eNZ$/$ (4)-(5) $ Profit 2000 6.55 6.51 2.2601 2001 6.72 6.01 2.4017 2002 4.93 2.45 1.9119 2003 5.96 1.46 1.5232 2004 5.90 1.47 1.3847 2005 6.69 3.11 1.4684 2006 7.30 4.85 1.4184 2007 8.05 5.34 1.2996 2008 9.12 4.23 1.7114 2009 5.12 2.01 1.3744
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 $1 million at the start of each year and investing in the New Zealand dollar for
one year. One-year interest rates and the exchange rate between the U.S. dollar ($) 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$1.9090 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
İNZ$(%)
is(%)
SNZ$I$
INZ$ - is
eNZ$/$
(4)-(5)
$ Profit
2000
6.55
6.51
2.2601
2001
6.72
6.01
2.4017
2002
4.93
2.45
1.9119
2003
5.96
1.46
1.5232
2004
5.90
1.47
1.3847
2005
6.69
3.11
1.4684
2006
7.30
4.85
1.4184
2007
8.05
5.34
1.2996
2008
9.12
4.23
1.7114
2009
5.12
2.01
1.3744
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