An FX Dealer Agrees to Supply $20 Million NZD in Exchange

question 106

Essay

An FX dealer agrees to supply $20 million NZD in exchange for AUD through a 150 day forward FX contract.The spot rate is AUD/NZD1.0987 and interest rates are 5% in New Zealand and 3.5% in Australia.a)Calculate the forward AUD/NZD rate using a 365-day-year for both countries.(Do not round your answer.)
b)Demonstrate how a FX dealer will ensure the supply of foreign currency required to settle a forward FX contract in a risk-free manner.

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