Question
A BBB bank expects NZD to appreciate from USD 0.50 to USD 0.55 over 5 days. US borrowing = 8% p.a., US lending = 6% p.a.; NZ borrowing = 4% p.a., NZ lending = 2% p.a. The bank executes an arbitrage strategy. Net profit as % of funds deployed over 5 days is approximately:
Note: Rate selection: Borrow at US BORROWING rate (bank’s cost = 8%); invest at NZ LENDING rate (bank’s earning = 2%). Do not confuse borrowing and lending rates.More Research Questions
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