Q 9 and Q 10 combined: You are a US investor. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have US $100,000 to invest for one year and you believe that PPP holds. The current spot exchange rate of an Australian dollar (AUD) is $0.7430 (i.e., the current spot exchange rate is 0.7430 USD per AUD).

Q 9: Assuming (relative) PPP holds, what do you forecast the spot exchange rate (i.e., number of USD per AUD) to be in one years time? Give your answer correct to 4 decimal places.

Q 10: What will be the yield on your investment if you invest in the Australian market? Give your answer as the yield per annum expressed as a percentage correct to one decimal place (eg, your answer might be 2.6 or 9.3 if you mean 2.6% or 9.3%).