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(a)Assume that the one-year interest rate is 6% in New Zealand and 10% in the US. The spot rate o...

(a)Assume that the one-year interest rate is 6% in New Zealand and 10% in the US. The spot rate of the NZ$ is $0.50 while the forward rate is $0.54. Would covered interest arbitrage be feasible for a US investor who is willing to invest $1,000,000 to exploit the opportunity of differences in interest rates? If the investment is worthwhile, find the profit the investor could earn in a year.  

 (b) Explain the realignment process that would eventually produce interest rate parity.

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Answer #1

b)

realignment process:

Since you borrow in USD and will invest in NZD,demand for NZD will increase because of which the exchange rate will also increase which will decrease the profits and eventually the forward rate will be 0.54 which is equal to given rate and this will produce interest rate parity

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