Covered Interest Arbitrage in Both Directions
Solve the following problem:
The 1-year interest rate in New Zealand is 6 percent. The 1-year U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZ$) is $.50. The forward rate of the New Zealand dollar is $.54. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible.