i. Company A's Investment Decision: Initial Situation: Current exchange rate: 0.7400 USD/AUD 0.7400USD/AUD Amount of cash on hand: 1 million USD 1million USD Loan amount: 2.5 million USD 2.5million USD Loan interest rate: 5 % 5% Australian market interest rate: 10 % 10% Step 1: Convert USD to AUD: Amount in AUD = Cash in USD Current exchange rate Amount in AUD=Cash in USDCurrent exchange rate Amount in AUD = 1 million USD 0.7400 USD/AUD Amount in AUD=1million USD0.7400USD/AUD Step 2: Invest in the Australian Market: Invest the total amount (cash + loan) in the Australian market at the local interest rate. Investment return in AUD = ( Amount in AUD ) ( 1 + Australian interest rate ) Investment return in AUD=(Amount in AUD)(1+Australian interest rate) Investment return in AUD = ( Amount in AUD ) ( 1 + 0.10 ) Investment return in AUD=(Amount in AUD)(1+0.10) Step 3: Convert Back to USD: Convert the investment return in AUD back to USD at the expected future exchange rate. Final return in USD = Investment return in AUD Expected future exchange rate Final return in USD=Investment return in AUDExpected future exchange rate Final return in USD = Investment return in AUD Expected future exchange rate Final return in USD=Investment return in AUDExpected future exchange rate ii. Company B's Risk Reduction Approach: Contract Details: Contracted exchange rate: 0.8500 USD/AUD 0.8500USD/AUD Value of the US Asset: 3.5 million USD 3.5million USD Step 1: Determine the Cost in AUD: Cost in AUD = Value of US Asset Contracted exchange rate Cost in AUD=Value of US AssetContracted exchange rate Cost in AUD = 3.5 million USD 0.8500 USD/AUD Cost in AUD=3.5million USD0.8500USD/AUD Assessment: If the final return in USD for Company A is higher than the initial investment, the strategy is beneficial. For Company B, if the cost in AUD is lower than the market exchange rate after a year, the strategy is beneficial. ii. Impact of USD Depreciation: For Company A, a depreciation means the final return in USD will be lower, affecting profitability. For Company B, a depreciation means the cost in AUD will be lower, reducing the expense. Calculation: Given that the US Dollar is expected to appreciate by 7%, calculate the expected future exchange rate for both companies: Expected future exchange rate = Current exchange rate ( 1 + Expected appreciation rate ) Expected future exchange rate=Current exchange rate(1+Expected appreciation rate) Evaluate the strategies by substituting the values into the calculations. If the expected future exchange rate is lower than the contracted rate for Company B, it would be advantageous for Company B. If the final return in USD for Company A is higher than the initial investment, it would be advantageous for Company A. Further Considerations: Consider the potential impact of transaction costs, fees, and other factors that may affect the actual returns and costs for both companies