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1. It is the end of September and the current AUD/USD exchange rate is 1.9230,...

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Finance

1. It is the end of September and the current AUD/USD exchange rate is 1.9230, the Australian and US three-month interest rates are 6 and 4.5% p.a. respectively. A forecast indicates that the exchange rate at the end of the year will be 1.8750.

(a) What would you do on the basis of this information?

(b) If the actual exchange rate turns out to be 1.9370, calculate the percentage forecasting error.

(c) Is there an error of direction in this forecast? (d) What is the outcome of acting on this forecast?

(a) The forecast indicates that the US dollar would depreciate by 2.5%, making it an opportunity to take a short position on the currency. By borrowing US dollars at 4.5% or 1.125% for three months and investing in Australian assets for three months at 1.5%, the expected net return will be 2.875% (the sum of the interest differential and the percentage change in the exchange rate).

(d) The exchange rate rose by 0.73%.

PLS TELL ME HOW DID THE VALUES OF ANS (A) AND (D) ARRIVED PLS.... I NEED DETAILED WORKINGS PLS

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