QUESTION 4 (15 MARKS) Enrich Corporation is a battery manufacturing plant in the United States. The company confirmed that it was planning to open factories in Britain and Australia. Supposed the spot exchange rate for Australian dollar is AS1.42 - S1, while the British pound exchange rate is 1 = $1.30. The inflation rate in the United States will be 2.9 percent per year, Britain 3.5 percent and 4.5 percent in Australia. You as one of the finance department team need to analyse on the expected effect of inflation to exchange rate and the possibility of triangle arbitrage Required; a) Discuss the political risk exposed to the Enrich Corporation if they decided to open new factory at overseas and what are some ways of hedging political risk. (4 marks) (CLO2.PL07:04) b) Predict the exchange rate will be for Australian dollar in two years (2 marks) (CLO2.PLO7.C2) c) Calculate the cross rate in terms of Australian dollar per pound (3 marks) (CLO2:PL07:C4) d) Company has $10,000 and planning to use this money for investment in the exchange market. Supposed the cross rate is AS1.75 - 1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing. (6 marks) (CLO2.PLO7:C2) QUESTION 4 (15 MARKS) Enrich Corporation is a battery manufacturing plant in the United States. The company confirmed that it was planning to open factories in Britain and Australia. Supposed the spot exchange rate for Australian dollar is AS1.42 - S1, while the British pound exchange rate is 1 = $1.30. The inflation rate in the United States will be 2.9 percent per year, Britain 3.5 percent and 4.5 percent in Australia. You as one of the finance department team need to analyse on the expected effect of inflation to exchange rate and the possibility of triangle arbitrage Required; a) Discuss the political risk exposed to the Enrich Corporation if they decided to open new factory at overseas and what are some ways of hedging political risk. (4 marks) (CLO2.PL07:04) b) Predict the exchange rate will be for Australian dollar in two years (2 marks) (CLO2.PLO7.C2) c) Calculate the cross rate in terms of Australian dollar per pound (3 marks) (CLO2:PL07:C4) d) Company has $10,000 and planning to use this money for investment in the exchange market. Supposed the cross rate is AS1.75 - 1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing. (6 marks) (CLO2.PLO7:C2)
