You have the opportunity to invest in the United States at 6% or invest in an equally risky Australian investment that offers 20%.This is too good to be true! The current exchange rate is A$1.65/$.Which of the following do you suspect about this one-year investment?

Question

Quizplus · Accepted Answer

The high return on the Australian investment is likely due to a higher expected inflation rate in Australia relative to the United States. This would cause an increase in the exchange rate in the future, which is reflected in the higher one-year forward exchange rate of A$1.8679/$. Therefore, investing in the Australian investment appears to be the better choice.

You Have the Opportunity to Invest in the United States