You see the following rates for NZD (New Zealand dollars) versus  AUD (Australian dollars) in the market.  The spot exchange rate (NZD per AUD) is 1.1000.     The six month NZD interest-rate is      3%     The six month AUD interest-rate is      2%     The six month market forward (NZD per AUD) is 1.1125 - 1.113. (There is a bid-ask spread in the market forward but no bid-ask spread in the spot market). Assume that six months is exactly 0.5 year.  Suppose that you are allowed to borrow 1 mio NZD (i.e., 1,000,000 NZD),  how much arbitrage profit can you make? Give your answer  to the nearest NZD.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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You are a trader at Dolphin Capital. 
You see the following rates for NZD (New Zealand dollars) versus 
AUD (Australian dollars) in the market. 

The spot exchange rate (NZD per AUD) is 1.1000.    
The six month NZD interest-rate is      3%    
The six month AUD interest-rate is      2%    
The six month market forward (NZD per AUD) is 1.1125 - 1.113.

(There is a bid-ask spread in the market forward but no bid-ask spread in the spot market).

Assume that six months is exactly 0.5 year. 

Suppose that you are allowed to borrow 1 mio NZD (i.e., 1,000,000 NZD), 
how much arbitrage profit can you make? Give your answer 
to the nearest NZD. 

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