3. (No Excel) A macro investor considers exchange rates. Suppose that, currently, the US interest rate is
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3. (No Excel) A macro investor considers exchange rates. Suppose that, currently, the US interest rate is 0%, the AU interest rate is 3%, US inflation is 1%, AU inflation is 2%, and 1 AUD = 0.7 USD. The macro investor believes that goods are currently more expensive in the US relative to the AU such that the PPP (purchasing power parity) exchange rate is currently 0.77 USD/AUD. The market exchange rate will be equal to the PPP exchange rate next year. If you borrow USD 100, exchange the money to AUD, leave it at the risk-free rate for 1 year, exchange back to USD, and pay back the loan, then you expect to have approximately (using rounding):
a. USD -8
b. USD 2
c. USD 3
d. USD 10
e. USD 13
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