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 1-year investment?

Question

Quizplus · Accepted Answer

The high interest rate differential between the two countries suggests that the market is expecting a higher exchange rate for the Australian dollar in the future, as reflected in the 1-year forward exchange rate of A$1.8679/$. This implies that the Australian dollar is expected to appreciate by 13%, which more than compensates for the higher interest rate spread. Therefore, investing in the Australian investment appears to be the better choice, assuming all other factors remain constant.

You Have the Opportunity to Invest in the United States