The spot rate on the NZ dollar is 1.4286 NZD/USD, and the 180 day forward rate is 1.3889 NZD/USD. This difference means a) interest rates must be lower in the US than in NZ b) interest rates must be higher in the US than in NZ c) the NZD is expected to depreciate d) the dollar is expected to appreciate

A The expectation is that NZD would appreciate. Now we can buy 1.4286 NZD for 1 USD , later we could buy only 1.3889 NZD for 1 USD

agree with A. NZD is expected to appreciate.

Answer was B. Still cant figure out why interest rates must be higher in the US than in NZ

hmmm…

schweser study notes, ss6, concept checker, Q5 thanks!

Doesn’t this have to do with interest rate parity? The interest rate must be higher in the country with the weaker currency. So if NZ currency is expected to appreciate against USD, then interest rate must be higher in the US.

I know I need to go back and recheck on my econ, but doesn’t higher interest rate leads a currency to appreciate. So if NZD is appreciating, which I THINK it is, shouldn’t rates in NZ be higher than the rates in the US.

I guess: For IRP to hold (1+Rd)/(1+Rf)=forward/spot therefore, (1+Rnzd)/(1+Rusd)=1.3889/1.4286 1+Rnzd/1+Rusd=0.97201 1+Rnzd/1+Rusd<1 hence, Rnzd

Conceptually, interest rate parity assumes that the REAL rate is the same everywhere. So, if the nominal interest rate is higher relative to another country, the expected rate of inflation must also be higher. This will cause the currency with the higher associated nominal interest rate to depreciate. Nominal Rate = Real Rate + Exp. Inflation

pass528 Wrote: ------------------------------------------------------- > I guess: > > For IRP to hold > > (1+Rd)/(1+Rf)=forward/spot > therefore, > (1+Rnzd)/(1+Rusd)=1.3889/1.4286 > 1+Rnzd/1+Rusd=0.97201 > 1+Rnzd/1+Rusd<1 > hence, > Rnzd > > dont think i am stupid if i am worng if i shift 1+Rnzd/ 1 +Rusd = 0.97201 to 1+ Rnzd = 0.97201 (1+ Rusd) Doesnt that imply R usd is less than Rnzd by approx 97%?

is there any possible that the answer is a wrong one??

Since Forward and Spot rates are actually the direct quotes, Domestic Interest Rate–> NZ Foreign IR --> USD hence the equation is: (1 + NZ Int Rate) = (1.3889 /1.4286) * (1. US Interest Rate) ===> NZ Int Rate < US Interest Rate. Also, maybe i am confused here, but Forward Rate < Spot Rate does not imply appreciation since the Forward Rate discrepancy could be due to real interest rate difference i.e, if the interest rate of NZ < FR of US, the F/S ratio will shift to eliminate risk free arbritrage (either spot rate increases or the FR decreases to elminate arbitrage.