QUESTION 3 (25 MARSKS) The Mexican peso (MXN) is expected to decline against the dollar in the…

QUESTION 3 (25 MARSKS)

1. The Mexican peso (MXN) is expected to decline against the
   dollar in the next 10 days, according to BBVA Bancomer, from its
   current spot rate of USD0.1500 to USD0.1400. There are the
   following rates for interbank lending and borrowing:

Assume BBVA Bancomer
has a borrowing capacity of USD10 million or MXN70 million in the
interbank market, depending on which currency it wishes to borrow.
Determine how BBVA Bancomer might capitalise on its projections
without utilising deposited money and earn potential profit from
this approach.

(11 marks)

1. In New Zealand, the one-year interest rate is 6%. The one-year
   interest rate in the United States is 10%. The New Zealand dollar
   (NZ$) has a spot rate of $.50. The New Zealand dollar has a forward
   rate of $.54.
   1. Explain if covered interest arbitrage can benefit US or New
      Zealand investors.

(7 marks)

1. Explain why covered interest arbitrage is or is not conceivable
   in each situation.

(7 marks)