FIN 4375 Please use the attached sheets to answer the questions below listed based on calculations using the data for New Zealand and the US during the assigned time period.
Use geometric instead of arithmetic averages.
Use exact instead of the approximate method.
Q1. During the assigned time period: US dollar appreciated / depreciated (choose one) in real terms against the currency of foreign country.
Q2. During the assigned period, what was the average uncovered rate of return from the US viewpoint for the foreign country?
Q3. During the assigned period, what was the average uncovered rate of return from the foreign country’s viewpoint?
Q4. Based on your answers to questions 2 and 3, given perfect hindsight about interest rates and exchange rate changes during the assigned time period you should have: Invested/ borrowed (choose one) in the US and invested / borrowed (choose one) in foreign country.
Q5. Assume that you could both borrow and invest at the average interest rates prevailing in foreign country and in the US during the assigned time period. Also assume that you have a line of credit for one million dollars in the US or an equivalent amount in foreign country. Given perfect hindsight about interest rates and exchange rate changes, please calculate your total profit in dollars using uncovered interest arbitrage during the assigned time period if you followed the strategy chosen in Q4.
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