Suppose you conduct currency carry trade by borrowing $1,000,000 at the start of each year and investing in the New Zealand dollar for one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided below for the period 2000-2009. Note that interest rates are one-year interbank rates on January 1 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$1.9110/S on January 1, 2000. Fill out columns 4-7 and compute the total dollar profit from this carry trade over the 10-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. Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 INZ5(%) 6.75 6.92 5.13 6.16 6.10 6.89 7.50 8.25 9.32 5.32 (%) 6.61 6.11 2.55 1.56 157 3.21 4.95 5.44 4.33 2.11 SNZ1/1 2.2621 2.4037 1.9139 1.5252 1.3867 1.4704 14204 1.3016 1.7134 1.3764 INZS-Is 0.23 eNz/s 18.30 (4)-(5) -18.13 $ Profit -181,253

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Suppose you conduct currency carry trade by borrowing $1,000,000 at the start of each year and investing in the New Zealand dollar
for one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided
below for the period 2000-2009. Note that interest rates are one-year interbank rates on January 1 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$1.9110/S on January 1,
2000. Fill out columns 4-7 and compute the total dollar profit from this carry trade over the 10-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.
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
INZS(%)
6.75
6.92
5.13
6.16
6.10
6.89
7.50
8.25
9.32
5.32
ig (%)
6.61
6.11
2.55
1:56
1.57
3.21
4.95
5.44
4.33
2.11
SNZ1/1
2.2621
2.4037
1.9139
1.5252
1.3867
1.4704
14204
1.3016
1.7134
1.3764
INZS-Is
0.23
eNz/
18.36
(4)-(5)
-18.13
$ Profit
-181,253
Transcribed Image Text:Suppose you conduct currency carry trade by borrowing $1,000,000 at the start of each year and investing in the New Zealand dollar for one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided below for the period 2000-2009. Note that interest rates are one-year interbank rates on January 1 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$1.9110/S on January 1, 2000. Fill out columns 4-7 and compute the total dollar profit from this carry trade over the 10-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. Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 INZS(%) 6.75 6.92 5.13 6.16 6.10 6.89 7.50 8.25 9.32 5.32 ig (%) 6.61 6.11 2.55 1:56 1.57 3.21 4.95 5.44 4.33 2.11 SNZ1/1 2.2621 2.4037 1.9139 1.5252 1.3867 1.4704 14204 1.3016 1.7134 1.3764 INZS-Is 0.23 eNz/ 18.36 (4)-(5) -18.13 $ Profit -181,253
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