The Figure Given Below Depicts the Foreign Exchange Market for British

question 87

Multiple Choice

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Suppose you are a U.S. exporter expecting to receive a payment of NZD1,000 (New Zealand dollars) in 12 months. The annual interest rate on NZD deposits is 5 percent, and the annual interest rate on dollar deposits is 9 percent. If the present exchange rate is $0.50 per NZD and interest rate parity holds, how many dollars do you expect to receive at the maturity date of the export contract?

• A)$2,000
• B)$1,923
• C)$1,000
• D)$580
• E)$520

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Definitions:

Lump Sum Payment

A single payment made for the total amount owed, rather than breaking the payment into installments, often used in settling debts or purchasing goods.

Simple Interest

A method of calculating the interest charge on a loan or financial product based on the original principal amount and the interest rate over a period of time.

Principal Amount

This is the original sum of money borrowed in a loan or put into an investment, not including any interest or dividends.

Invested

Describes the act of allocating resources, usually money, into something to earn income or gain profits.