Assume the U.S. interest rate is 7.5%, the New Zealand interest rate is 6.5%, the spot rate of the NZ$ is $.52, and the one-year forward rate of the NZ$ is $.50. At the end of the year, the spot rate is $.48. Based on this information, what is the effective financing rate for a U.S. firm that takes out a one-year, uncovered NZ$ loan?
A)about -1.7%.
B)about 0.0%.
C)about 14.7%.
D)about 15.4%.
E)about 8.3%.

Question

Quizplus · Accepted Answer

$\%$ change in $\mathrm { NZ } \$ = \frac { \$ .48 - .52 } { \$ .52 } =$ about $- 7.7 \%$
Effective financing rate $= ( 1 + 6.5 \% ) [ 1 + ( - 7.7 \% ) ] - 1 =$ about $- 1.7 \%$