uestion 1 (5 marks): The borrowing rate in USD is 10 percent (annualized). ABC bank has the capacity to borrow $7.3 million [i.e., $7,300,000]. ABC can use the proceeds to invest in Australian dollars. The lending rate in A$ is 8 percent (annualized) over a 150-day period. The Australian dollar is worth $.7135 and is expected to be worth $.7625 in 150 days. Based on this information, should STS Bank borrow U.S. dollars and invest in Australian dollars? What would be the gain or loss in U.S. dollars? Calculate the break-even spot rate at the end of the investment period as well.

Question 2 [4 marks] (a) Today you notice the following exchange rate quotations: $1 = 4.95 Brazil real and 1 Brazil real = .2625 Canadian dollars. You need to purchase 300,000 Canadian dollars with U.S. dollars. How many U.S. dollars will you need for your purchase? -----(b) STS Banks bid price for Canadian dollars is $.8001 and its ask price is $.8221. What is the bid/ask percentage spread? Is the bid-ask spread too narrow? Discuss.