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Problem \#3: Covered interest arbitrage is extremely important to understanding whether it may be feasible for investors and multinational corporations to engage in currency transactions. Suppose that you are an investor from the United States and you are interested in the spread between the interest rates between New Zealand and the United States. You have $1,000,000 in U.S. dollars to invest: - The one-year interest rate in New Zealand =6% - The one-year interest rate in the U.S. =10% - The spot rate of the NZS=$0.50. - The forward rate of the NZS=$0.54 a. From the point of the U.S. investor, if you engage in sovered interest arbitrage (hint: purchases NZS and invests in New Zealand), how much money (in USD) would this yield in one-year? a. How much money (as a percentage) would this transaction yield in one-year? b. Should the U.S. investor engage in covered interest arbitrage? Why or why not? b. Suppose that you are a New Zealand investor and you have NZ\$1,000,000 to invest (hint: purchase U.S. dollars and invests in the United States), how much money (in NZS) would this yield in one-year? a. How much money (as a percentage) would this transaction yield in one-year? b. Should the New Zealand investor engage in covered interest arbitrage? Why or why not

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