Question

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Question 10 OZ Bank in Australia invests in one-year U.S. treasury bond, which pays an interest rate of 10% per annum. Currently, the spot exchange rate is AU$1.25 per US$. What will be the return in the local currency (AU$) for the bank's U.S. Not yet answered treasury bond investment, if the exchange rate changes to AU$1.15 per US$ in one year? Please express your answer in percentage form (i.e., %), and round the number to the nearest 2nd decimal. You don't need to key in %, though it Marked out of 1.00 does not matter (i.e., 10 and 10% will be treated the same in grading). P Flag question Answer:

Answer 1

Steps

1. Convert AU$1 into US$ using spot exchange rate AU$/US$= 1/1.25 = 0.8

2. Invest US$0.8 @10% in US Treasury bonds for one year

3. Value of investment will be after one year = 0.8(1.1) = US$0.88

4. Convert back US$0.88 to AU$ using spot exchange rate of US$/AU$ =1.15

Value after conversion = 0.88*1.15 = AU$1.012

Return = (1.012-1)/1 = 1.2%