Question 4 (total of 10 marks): An investor has some Australian and Indian assets and liabilities as follows:

• AUD 600,000 apartment which is partly financed with a loan.
• AUD 550,000 mortgage loan.
• AUD 50,000 in her deposit account at the bank.
• INR 1,470,000 in Indian shares. Note the shares are denominated in Indian Rupees (INR), not Australian Dollars (AUD).
• The current exchange rate is 0.7 USD = 1 AUD.
• The current exchange rate is 70 INR = 1 USD. Note that this exchange rate is not per AUD. Its in INR per USD.

Give your answer as a decimal correct to at least 6 decimal places. So for example if your answer is 1.23456789%, write 0.0123456789. If your answer is 400,000, write 400000. Do not use percentages and do not write units (m or k) after the number.

Question 4a (2 marks): What is the investors net wealth? State your answer in AUD.

Answers: Answer

Question 4b (1 marks): What is the weight of the asset class real estate in the investors net wealth?

Answers: Answer

Question 4c (1 marks): What is the weight of the asset class debt in the investors net wealth? Remember that all things that have characteristics of debt should be included in the asset class debt.

Answers: Answer

Question 4d (2 marks): What new INR per AUD exchange rate would cause the investors wealth to be AUD150,000? Assume that the shares remain the same value in INR.

State your final answer in INR per AUD. For example, if you thought the answer was 60 INR per AUD, write 60.

Answers: Answer

Question 4ei (2 marks): The investor currently has her AUD 50,000 spare cash invested in 1% pa term deposits in an Australian bank in AUD.

She notices that Indian banks pay 6% pa term deposit rates on INR.

Both Australia and India have floating exchange rates and no capital controls.

Stella is considering converting her AUD50,000 to INR now, investing in INR term deposits, and then converting the INR back to AUD in one year.

Calculate the 1 year forward INR per AUD cross rate assuming that the principal of cross-currency interest rate parity holds.

Answers: Answer INR per AUD

Question 4eii (2 marks): Whats the NPV of converting the AUD50,000 into INR, investing it at an Indian banks term deposit rate and converting back to AUD in one year? Again, assume that cross currency interest rate parity holds. Give your answer in AUD, rounded to at least 6 decimal places.

Answers: Answer AUD