Question

12. Your firm wants to convert $1.4 million Australian into U.S. dollars in purchase in 12...

12. Your firm wants to convert $1.4 million Australian into U.S. dollars in purchase in 12 months. The spot rate is $0.9704 equals $1 Australian. The inflation rates in Australia and the United States are expected to be 6 percent and 2 percent, respectively. Using the concept of purchasing power parity (PPP) as it relates to future exchange rates, determine the difference in costs between completing the transaction now and doing it in 12 months.

A. $60,242 B. $54,320 C. $36,821 D. $42,568

Homework Answers

Answer #1

First of all lets calculate forward exchange rate

according to interest rate parity

F/s =(1+r)/(1+r)

F= forward rate, s = spot rate , r = rate of interest

=F/0.9704 = (1+2%)/(1+6%)

F/0.9704 = (1.02)/(1.06)

F = 0.9704 * (1.02)/1.06

=0.9338

Now lets convert australian $ into USD at spot rate

1 australian $ = 0.9704 USD

$1.4 mln = ?

=1.4*0.9704

=1.35856 $

Now lets convert australian $ into USD at Forward rate

1 australian $ = 0.9338 USD

$1.4 mln = ?

=1.4*0.9338

=1.30732$

Difference in cost = 1.35856 - 1.30732 = 0.051268 mln

Thus ans $51,268

(PS i know the above answer is not in option as given, But this is the right answer)

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Alicia Strong is a foreign exchange dealer for a bank in Australia. She wishes to consider...
Alicia Strong is a foreign exchange dealer for a bank in Australia. She wishes to consider whether International Parity Condition (IPC) holds between the British pound and the Australian dollar. Alicia also wonders whether she should invest in AUD or in British pounds (£) to make a covered interest arbitrage (CIA) profit. Depending on the CIA opportunity, she can borrow either A$1,000,000 or £1,000,000 to invest for the next 12 months. Consider Australia as home market and the UK as...
The country of Daytona, whose currency is the U.S. dollar and the country of Prescott have...
The country of Daytona, whose currency is the U.S. dollar and the country of Prescott have the same real interest rate of 3 percent. The expected inflation over the next year is 6 percent in Daytona versus 21 percent in Prescott. The one-year currency futures contract on Prescott’s currency (called the pres) is priced at $.30 per pres. What is the spot rate of the pres assuming interest rate parity holds? Estimate the expected profit or loss if an investor...
James Smith, an international fund manager, uses the concepts of purchasing power parity (PPP) and the...
James Smith, an international fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. James gathers the financial information as follows: Current rand spot exchange rate $0.188 Expected annual U.S. inflation 8% Expected annual South African inflation 6% Expected U.S. one-year interest rate 1% Expected South African one-year interest rate 0.08% Calculate the following exchange rates (ZAR and USD refer to the South African rand and U.S. dollar, respectively)....
Q1. Perth International Co., an Australian multinational company, forecasts 66 million Australian dollars (A$) earnings next...
Q1. Perth International Co., an Australian multinational company, forecasts 66 million Australian dollars (A$) earnings next year (i.e., year-one). It expects 56 million Chinese yuan (CNY), 42 million Indian rupees (INR) and 33 million Malaysian ringgit (MYR) proceeds of its three subsidiaries in year-one. It also forecasts the year-one exchange rates A$0.2543/CNY, A$0.0420/INR and A$0.6944/MYR. Calculate the total Australian dollar (A$) cash flow for year-one. (enter the whole number with no sign or symbol) Ans: 104,920,000 Q2: Perth International anticipates...
The treasurer of a major U.S. firm has $32 million to invest for three months. The...
The treasurer of a major U.S. firm has $32 million to invest for three months. The interest rate in the United States is .45 percent per month. The interest rate in Great Britain is 0.5 percent per month. The spot exchange rate is £0.56, and the three-month forward rate is £0.61. Ignore transaction costs. If the treasurer invested the company's funds in the U.S., what would the value be in three months? If the treasurer invested the company's funds in...
the australian DOLLAR IS CURRENTLY 0.7100 U.S. DOLLARS AND THIS EXCHANGE RATE HAS VOLATILITY OF 12%,...
the australian DOLLAR IS CURRENTLY 0.7100 U.S. DOLLARS AND THIS EXCHANGE RATE HAS VOLATILITY OF 12%, THE AUSTRALIA RISK FREE RATE IS 9% AND THE US RISK FREE RATE IS 6% using derivagem to value a six months american call option with a strike price of 0.6500,by using a four step tree, the value of the option is A:$0.0426 B:$0.0526 C$0.0034 D$0.0698 E$0.0022
Your Australian friend is a foreign exchange student in Boston. Because of the travel restrictions in...
Your Australian friend is a foreign exchange student in Boston. Because of the travel restrictions in place, she is unable to return to Australia. To fund her accommodation and living expenses in the US, she decides to invest some money for 245 days. She can invest in Australia, where annualised 245-day interest rates are currently 3.94%. Alternatively, she can convert her Australian dollars into USD at a current spot rate of AUD0.8505/USD and invest at an annualised 245-day interest rate...
11. Suppose that apples were the only good produced in the United States and Mexico. In...
11. Suppose that apples were the only good produced in the United States and Mexico. In Mexico, apples sell for 12 pesos apiece. In the Unites states, apples sell for $0.50 apiece. a. According to the theory of Purchasing Power Parity, what is the equilibrium nominal exchange rate between the U.S. dollar and the Mexican peso? What would the real exchange rate between the U.S. and Mexico in that case? b. Suppose the price of apples rises at a rate...
Problem 20-7 Interest Rates and Arbitrage The treasurer of a major U.S. firm has $22 million...
Problem 20-7 Interest Rates and Arbitrage The treasurer of a major U.S. firm has $22 million to invest for three months. The interest rate in the United States is .22 percent per month. The interest rate in Great Britain is .27 percent per month. The spot exchange rate is £.622, and the three-month forward rate is £.624. Ignore transaction costs.    What would be the value of the investment in three months if the money is invested in the U.S....
Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent...
Sun Bank USA has purchased a 16 million one-year Australian dollar loan that pays 12 percent interest annually. The spot rate of U.S. dollars for Australian dollars (AUD/USD) is $0.757/A$1. It has funded this loan by accepting a British pound (BP)–denominated deposit for the equivalent amount and maturity at an annual rate of 10 percent. The current spot rate of U.S. dollars for British pounds (GBP/USD) is $1.320/£1. (LG 9-5) What is the net interest income earned in dollars on...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT