a) compute ( to 4 decimal places) the 1-year forward FX rate if the spot AUD/USD rate is AUD/USD 0.7000, the 1-year US interest rate is 2.5%p.a and the 1-year Australian interest rate is 0.5%p.a with both interest rates quoted on an annual compound basis.

b)Calculate the return(%pa to 2 decimal places) for an Australian investor of an investment of AUD1m in a US 1-year security if at the end of the investment period the spot rate is AUD/USD 0.7500 if the investment is:(1) unhedged and (2) hedged using a forward contract.

c) Provide a rationale for the return answers (b)(1) and (b)(2) above.