example 2.

An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or Switzerland.The following information is available

Initial spot exchange rate (AUD/CHF)1.0775-1.0825

Australian three month LIBOR rate4.75-5.25% p.a.

Swiss three month LIBOR rate2.25-2.75% p.a.

Australian lending/borrowing spread+1.5%p.a.

Swiss lending/borrowing spread+0.5%p.a.

Required:

(a)If the ending spot exchange rate (AUD/CHF) is expected to be 1.0875-1.0925, which financing option should be taken.(3 marks)

(b)If the ending spot exchange rate turned out to be (AUD/CHF) 1.0675-1.0725, would your decision have been profitable.(3 marks)

(c)Determine the profit or loss from your decision.(2 marks)