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You have $100,000 in cash. Alternative 1: You can either invest that in US dollars for 12 months, or Alternative 2: You can invest in

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You have $100,000 in cash. Alternative 1: You can either invest that in US dollars for 12 months, or Alternative 2: You can invest in Australian dollars for 12 months. If you invest in Australian dollars, you must use the forward exchange rate to hedge your foreign exchange risk. USA: 12-month LIBOR US$ interest rate = 3% AUSTRALIA: 12-month LIBOR AS interest rate = 6% Spot Exchange rate: US$ 0.75 per AS 12-month Forward Exchange rate: US$ 0.74 per A$ 1. If you invest US$100,000 for 12 months at 3% in the United States, what 5 points is your future value in US$?* FVS-PVS(1+1$) 2. If you convert US$100.000 into Australian dollars in the spot market. how many A$ will you have now? 5 points Your answer 3. If you invest the above A$ amount for 12 months at 6% in Australia, what 5 points is the future value in A$? Your answer 4. What is the future value in US$ if you convert the future value of the As Sports investment using the forward rate? 5. Is the US$ investment or the hedged A$ investment the better alternative? 5 points Your answer 6. What should the forward rate be in order for both alternatives to give you the same future value? NO ARBITRAGE OPPORTUNITY!! 5 points Your answer 7. The NO ARBITRAGE OPPORTUNITY condition is achieved by the actions 5 points of investors/arbitrageurs like youll Briefly explain the changes in US and Australian interest rates and spot and forward rates that make arbitrage profits equal zero Your

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