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

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An Australian company is considering a three month short-terminvestment of 10,000AUD in either Australia or Switzerland. Thefollowing 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.
Required: (a) If the ending spot exchange rate (AUD/CHF) isexpected to be 1.0875-1.0925, which financing option should betaken.
(b) If the ending spot exchange rate turned out to be (AUD/CHF)1.0675-1.0725, would your decision have been profitable.
(c) Determine the profit or loss from your decision.

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3.7 Ratings (640 Votes)

a If we invest AUD 10000 in Australia for 3months then return on that investment would be 475 15 spread because investment will earn rate of deposit spread Return after 3months 100004751590360 100000062590360 100000015625 15625 So at the end of 3months 10000 AUD will become 1000015625 1015625 AUD If we invest AUD 10000 in Switzerland for 3months then first we need to convert See Answer

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An Australian company is considering a three month short-terminvestment of 10,000AUD in either Australia or Switzerland. Thefollowing information is availableInitial spot exchange rate (AUD/CHF) 1.0775-1.0825Australian 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.Required: (a) If the ending spot exchange rate (AUD/CHF) isexpected to be 1.0875-1.0925, which financing option should betaken.(b) If the ending spot exchange rate turned out to be (AUD/CHF)1.0675-1.0725, would your decision have been profitable.(c) Determine the profit or loss from your decision.