An Australian company wishes to invest AUD100 000 surplus cash for three months. Three-month interest rates in the U.S. are 1.00% pa, the AUD/USD spot rate is 0.6600 and the estimated spot rate at maturity is 0.6700. What is the estimated rate of return per annum?

Question

Quizplus · Accepted Answer

The estimated rate of return is calculated by considering both the interest earned in the U.S. and the change in the exchange rate. The AUD appreciates from 0.6600 to 0.6700, which affects the return when converting back to AUD. The calculation involves converting AUD to USD, earning interest, and converting back to AUD at the new rate, resulting in an annualized return of approximately 7.08% pa.

An Australian Company Wishes to Invest AUD100 000 Surplus Cash