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You are a Canadian fund manager and are considering conducting a foreign investment in Australia. You would like to invest C$100,000 for one year in
You are a Canadian fund manager and are considering conducting a foreign investment in Australia. You would like to invest C$100,000 for one year in Australia in Australian Dollar (A$) and you will convert the A$ proceeds back to C$ at year end. There is currently an investment opportunity in Australia that generates an annual rate of return of 4.8%. The current spot exchange rate is C$1.065/A$. Suppose the expected inflation rates in Canada and Australia are 0.5% and 3.4% respectively. According to PPP, what will be the spot exchange rate of A$ at year end? ____[Blank #1]____ (Expressed in C$ per A$; give your answer to third decimal point). Based on the spot exchange rate prediction calculated above, what will be your gross return in C$ if you conduct the investment in Australia? ___[Blank #2]___ (Give your answer to the nearest Canadian dollar)
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