Question
20. IFE, Cross Exchange Rates, and Cash Flows. Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied
20. IFE, Cross Exchange Rates, and Cash Flows. Assume the Hong Kong dollar (HK$) value is
tied to the U.S. dollar and will remain tied to the U.S. dollar. Assume that interest rate parity exists.
Today, an Australian dollar (A$) is worth $.50 and HK$3.9. The one-year interest rate on the
Australian dollar is 11%, while the one-year interest rate on the U.S. dollar is 7%. You believe in the
international Fisher effect.
You will receive A$1 million in one year from selling products to Australia, and will convert these
proceeds into Hong Kong dollars in the spot market at that time to purchase imports from Hong
Kong. Forecast the amount of Hong Kong dollars that you will be able to purchase in the spot market
one year from now with A$1 million. Show your work.
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