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On January 31, 2017, you purchased 2,500 Australian Exchange-traded Treasury Bonds denominated in the Australian dollar (AUD) at 102.50 AUD per bond. In order to make this purchase, you had to exchange your USD into AUD at the rate of 1.3450 AUD per 1 USD. Each of the bonds has a face value of 100 AUD, carries an annual coupon rate of 5.5%, pays coupons semiannually (on the 31st of the respective months), and matures on January 31, 2018. At the time of purchase, the bonds had just paid their semiannual coupon immediately before you purchased them. You worry about the exchange rate risk and consider two exit scenarios. In both cases, assume that the Australian Treasury will not default on its bonds. Also, when you collect multiple coupons during your holding period (as in scenario (a) below), assume that the coupons are not reinvested and that all coupons collected are kept in AUD until you sell the bonds. At the time of exit (bond sale), all payments obtained from the bonds during the holding period are exchanged into USD in one transaction at the exchange rate prevailing at the time of exit.

You consider two exit scenarios:

(a) You will hold the bonds until maturity. What is the break-even exchange rate of AUD to USD (i.e., the maximum number of AUD per USD) on January 31, 2018 such that your total holding period return in USD on this investment is at least not negative? State the exchange rate as AUD per USD.

(b) You will collect the July coupon and sell the bonds immediately thereafter on July 31, 2017. Assume that there will be no major interest rate shocks in the Australian market and that the YTM on the bonds will be the same on July 31, 2017 as it was on January 31, 2017. What is the exchange rate (i.e., the maximum number of AUD per USD) at the end of July 2017 such that your effective annualized return in USD on this investment is at least 2%? State the exchange rate as AUD per USD.

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