Paragiapn 2. (1.25 Points) The spot rate of the New Zealand dollar is $0.68. The
ID: 2806013 • Letter: P
Question
Paragiapn 2. (1.25 Points) The spot rate of the New Zealand dollar is $0.68. The spot rate of the Argentine Peso is 0.084 New Zealand dollars. You expect that the one-year inflation rate is 8 percent in the New Zealand, 10 percent in Argentine, and3 percent in the US. Theone-year interest rate is 9% in New Zealand, 896 in Argentine, and 2% in the U.S. Assume that locational arbitrage and triangular arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in the - our expected spot rate of the Argentine Peso in one year with respect to the U.S. dollar?Explanation / Answer
Looking at your answer working it is pretty clear that you understand the concept. So i will just explain what was wrong with your working.
Always remember one thing, when the interest rate of one country is higher than another(In this case the interest rate of Argentina is higher than that of US), the currency of the country with the higher country will depreciate against that of the country with lower interest rate. That is ARS (argetine peso) wil;l depreciate againt USD in the long run. So it is clear that 1 ARS which fetched 0.05712 today will not fetch 0.06048 after a year. The only mistake you did is divide 1.08/1.02, it should have been the inverse (also you can change the from ARS/USD to USD/ARS in case you want to maintain the division). So the answer when you make the change will be 0.05712*1.02/1.08 = 0.05395
Hope it is clear. next time on remeber to check using the belwo logic
when the interest rate of one country is higher than another(In this case the interest rate of Argentina is higher than that of US), the currency of the country with the higher country will depreciate against that of the country with lower interest rate.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.