Question

An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or Switzerland. The following information is available

Initial spot exchange rate (AUD/CHF)                      1.0775-1.0825

            Australian three month LIBOR rate (deposit – loan) 4.75-5.25% p.a.

            Swiss three month LIBOR rate (deposit – loan)        2.25-2.75% p.a.

            Australian lending/borrowing spread                          +1.5%p.a.

            Swiss lending/borrowing spread                                 +0.5%p.a.

If the ending spot exchange rate (AUD/CHF) is expected to be 1.0875-1.0925, which financing option should be taken.            

If the ending spot exchange rate turned out to be (AUD/CHF) 1.0675-1.0725, would your decision have been profitable.                  

           

Answer 1

ad If we tnvest Aud lo o00 in Australia fo 3-months then elurn on that investment would be 4.15%. +1.57. sp1ead spicad because învestment will ea1n Yate of deposit Retuin after 3months = lo,00ox (415.+t5%.) X 90 360 lo ooo o.0625 X 901360 to o00 x o O156a5 156 25 So, at the cnd of 3-months lo 000 AUD will becoMe lo o0o t 56.25 ED156-25 AU D o oo0 in Scoiterland -fo7 3-month e invest AUD coe need Lo Conveit AuD in to CHE then -fitst we using spot Yate and then Teturn on thal investment would be a.a57 t0-57. spread because investment will earn Tate depostt spiead At the end of 3-months of again we nced to Conveit the înVestment + Teturn on CHF to AUD using ending spot Tate to compate reluins carned in Aust ralia and Switicıland CHE Value of lo o00 AUD CuTYent 9281 CHF 075

becouse this the We need to use spot bid Tale of 1o115 and lo O00 AUD -fYom us Tate at cohich Ex dealer coill cqafvalent ohich dealer coill sell the Curncn give the CHF the othe1 Tale is Ask Tale at Return after 3-months =q,381 X (a.a5%.+o 5.) x90/360 9281 X 00a15X 90/360 9/28 o 00615 63.81 Now we Conveit q,281t 63.31 CHF to AUD using cnding Spot cachange Tatc C281t 63.81) 1. 0815 Re-turn in AUp = 91344.81x1.0915 o,162 48 AUD - FTom the abovc colculatíons 'oe can See that 3-mon ths Suterland gets us lo,162.46 inVestment of lo,o00 Auo în -to lo156.a5 AUD in Australia Compared AUD Suoitter land should inVesl in s So coe Spot cxchange 1ate is o615 then Suwiss Inveslment coill be cwor th Value of swiss inVestment after 3-months = [9.281 +63.8) X1.065

3481X Io65 9,915.58 -AUD ending Spot Cochange 1ate, 3-months investmeot in Swilierland in AUD is locoey than 3-month Duc to unfavorable iovestment Yn Australia So our inueslment in Soitzerland will not be Profita ble