Provo Co. has $15 million that it will not need until one year from now. It can invest the funds in U.S. dollar–denominated securities and earn 6 percent or in New Zealand dollars (NZ$) at 11 percent. It has no other cash flows in New Zealand dollars. Assume that interest rate parity holds, so the one-year forward rate of the NZ$ exhibits a discount in this case. Provo expects that the spot rate of the NZ$ will depreciate but not as much as suggested by the one-year forward rate of the NZ$.
a. Should Provo consider investing in NZ$ and simultaneously selling NZ$ one year forward to cover its position? Explain.
b. If Provo invests in NZ$ without covering this position, is the effective yield expected to be above, below, or equal to the U.S. interest rate of 6 percent? Is the effective yield  expected to be above, below, or equal to the New Zealand interest rate of 11 percent?
c. Explain the implications if Provo invests in NZ$ without covering its position, and the future spot rate of the NZ$ in one year turns out to be lower than today’s one-year forward rate on the NZ$.