Answer:
Its dollar profit from speculation over the five-day period will be <u>$208,035.93</u>.
Explanation:
This can be determined as follows:
Assuming Baylor Bank borrow $5,000,000
The borrowing will be converted to New Zealand dollar at the current exchange rate and we will have:
Conversion = $5,000,000 / 0.48 = NZ$10,416,667
The NZ$10,416,667 shall be invested at an annualized based on New Zealand lending rate of 6.75% over five days. This will produce future value (FV) as follows:
FV of investment = Amount invested * (1 + NZ lending rate)^(5 years / 360 days) = NZ$10,416,667 * (1 + 6.75%)^(5 / 360) = NZ$10,426,121.44
Converting the NZ$10,426,121.44 to dollar at the new rate of $.50 as follows:
New conversion = NZ$10,426,121.44 * $.05 = $5,213,060.72
Amount to repay based on the US borrowing rate = Amount borrowed in USD * (1 + US borrowing rate)^(5 years / 360 days) = $5,000,000 * (1 + 7.5%)^(5 / 360) = $5,000,000 * 1.00100495826555 = $5,005,024.79
Profit = New conversion - Amount to repay = $5,213,060.72 - $5,005,024.79 = $208,035.93
Therefore, its dollar profit from speculation over the five-day period will be <u>$208,035.93</u>.
