1:

The one-year liability interest rate in Australia is 10%. The one-year asset interest rate in Australia is 15%. The one-year liability interest rate in the US is 6%. The one-year asset interest rate in the US is 9%.

The current exchange rate is 1.2 AUD for 1 USD.

A financial institution has a present value of 100 AUD invested in the US (denominated in USD) and 100 AUD invested in Australia (denominated in AUD). The financial institution has 200 AUD liabilities denominated in AUD.

a)Calculate the present value of the 100 AUD investment in the US in USD.

b)Calculate the promised repayment amount in the currency of denomination for the assets

and liabilities in one year from now.

c)The exchange rate in one year from now can have the following three values

1.1 AUD for 1 USD1.2 AUD for 1 USD1.3 AUD for 1 USD

For each of the exchange rates calculate the 'asset value minus liability value' in AUD in one year from now.

2:

The nominal interest rate in Australia is 5% and the spot exchange rate is 1.6 AUD for 1 USD.

a)The nominal interest rate in the US is 2%. Calculate the forward exchange rate.

b)The nominal interest rate in the US is 8%. Calculate the forward exchange rate.

c)Compare the results in a) and b) with the spot-exchange rate. Explain your findings.