The treasurer of a Swiss company operating in New Zealand considers a one-year bank loan of €400,000 with an interest rate of 4.2% (euro based). The current spot rate is €1.6311/NZ$ and a local loan in New Zealand dollars (NZ$) would carry a rate of 4.0%. Expected inflation rates are 2.5% and 2.2% in New Zealand and in Europe, respectively, for the coming year.
According to purchasing power parity, what is the effective cost of NZ$ funds for the Swiss Company?
If the future spot rate is €1.6025/NZ$, what is the effective cost of NZ$ funds for the Swiss Company?