1-Year government T-bill yield Rate of inflation United Kingdom 4.4% 2.0% Australia 5.4% 2.977% The current spot exchange rate is 2.4288 Australian dollars ("AUD") per pound ("GBP"). The 1-year forward exchange rate is 2.4625 AUD per GBP. Required: a. Assume that absolute purchasing power parity holds. A basket of goods currently costs 100 AUD. Determine what the identical basket of goods should cost in the UK (1 Mark). b. Determine if interest rate parity between the two countries is holding (show your calculations). (2 Marks) c. You are the treasurer of a company in the UK that has 10,000,000 GBP to invest for one year. You want to invest these funds in risk-free securities and also hedge any exchange rate risk if you invest outside of the UK. You are tempted by the higher rate of interest in Australia. Where should you invest these funds - in the UK or Australia and how much better off will you be? Show all calculations. (4 Marks) 1-Year government T-bill yield Rate of inflation United Kingdom 4.4% 2.0% Australia 5.4% 2.977% The current spot exchange rate is 2.4288 Australian dollars ("AUD") per pound ("GBP"). The 1-year forward exchange rate is 2.4625 AUD per GBP. Required: a. Assume that absolute purchasing power parity holds. A basket of goods currently costs 100 AUD. Determine what the identical basket of goods should cost in the UK (1 Mark). b. Determine if interest rate parity between the two countries is holding (show your calculations). (2 Marks) c. You are the treasurer of a company in the UK that has 10,000,000 GBP to invest for one year. You want to invest these funds in risk-free securities and also hedge any exchange rate risk if you invest outside of the UK. You are tempted by the higher rate of interest in Australia. Where should you invest these funds - in the UK or Australia and how much better off will you be? Show all calculations. (4 Marks)