EECS 1710 Lecture Notes - Lecture 20: New Zealand Dollar, United States Dollar, Exchange Rate
24 Jun 2018
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EECS 1710 Lecture 20 Notes
Introduction
Exchange rate
Assume that Carbondale Co. expects an exchange rate of $.48 for the New Zealand
dollar on day 30.
It can borrow New Zealand dollars, convert them to U.S. dollars, and lend the U.S.
dollars out.
On day 30, it will close out these positions.
Using the rates quoted in the previous example and assuming that the firm can borrow
NZ$40 million, Carbondale takes the following steps.
Borrow NZ$40 million.
Convert the NZ$40 million to $20 million (computed as NZ$40,000,000 $.50).
3. Lend the U.S. dollars at 6.72 percent, which represents a .56 percent return over the
30-day period.
After 30 days, it will receive $20,112,000 [computed as $20,000,000 (1 þ .0056)].
Use the proceeds of the U.S. dollar loan repayment (on day 30) to repay the New
Zealand dollars borrowed.
The annual interest on the New Zealand dollars borrowed is 6.96 percent, or .58 percent
over the 30-day period [computed as 6.96% (30=360)].
The total New Zealand dollar amount necessary to repay the loan is therefore
NZ$40,232,000 [computed as NZ$40,000,000 (1 þ .0058)].
If that the exchange rate on day 30 is $.48 per New Zealand dollar, as anticipated, then
the number of U.S. dollars necessary to repay the NZ$ loan is $19,311,360 (computed as
NZ$40,232,000 $.48 per New Zealand dollar).
Given that Carbondale accumulated $20,112,000 from its U.S. dollar loan, it would earn
a speculative profit of $800,640 without using any of its own money (computed as
$20,112,000 $19,311,360).
Document Summary
Assume that carbondale co. expects an exchange rate of $. 48 for the new zealand dollar on day 30. It can borrow new zealand dollars, convert them to u. s. dollars, and lend the u. s. dollars out. The annual interest on the new zealand dollars borrowed is 6. 96 percent, or . 58 percent over the 30-day period [computed as 6. 96% (30=360)]. Most money center banks continue to take some speculative positions in foreign currencies. In fact, some banks" currency trading profits have exceeded million per quarter. Borrow new zealand dollars, convert them to u. s. dollars, and lend the u. s. dollars out. On day 30, it will close out these positions. Using the rates quoted in the previous example and assuming that the firm can borrow. Convert the nz million to million (computed as nz,000,000 $. 50). Lend the u. s. dollars at 6. 72 percent, which represents a . 56 percent return over the.
