Chapter 6 Assignment
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Suppose you conduct currency carry trade by borrowing $1 million at the start of each year and investing in the New Zealand dollar for
one year. One-year interest rates and the exchange rate between the U.S. dollar ($) and New Zealand dollar (NZ$) are provided below
for the period 2000-2009. Note that interest rates are one-year interbank rates on January 1st 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$1.9126 per $ on January 1,
2000. Fill out columns (4) - (7) and compute the total dollar profits from this carry trade over the ten-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.
Note: Negative value should be entered with a minus sign. Enter profit value answers in dollars, rather than in millions of dollars.
Do not round intermediate calculations. Round interest rate spread, rate of appreciation, and difference between the two to 2
decimal places. Round profit values to nearest dollar value.
Year
iNZs(%)
is(%)
SNZ$/S
Ä°NZs - is
ENZ$/$
(4)-(5)
$ Profit
2000
6.91
6.69
2.2637
2001
7.08
6.19
2.4053
2002
5.29
2.63
1.9155
2003
6.32
1.64
1.5268
2004
6.26
1.65
1.3883
2005
7.05
3.29
1.4720
2006
7.66
5.03
1.4220
2007
8.41
5.52
1.3032
2008
9.48
4.41
1.7150
2009
5.48
2.19
1.3780
Check my work
