What is the rate of return to an Australian investor who purchases US dollars with A$100 000 when the exchange rate is AUD 1 = USD 0.74 then invests in a US bank at 7% p.a.interest for 12 months and converts the investment back to Australian dollars when the exchange rate is AUD 1 = USD 0.76?

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The investor initially converts A$100,000 to USD at 0.74, resulting in USD 74,000. After 12 months at 7% interest, the investment grows to USD 79,180. Converting back to AUD at 0.76 results in A$104,184.21. The rate of return is (104,184.21 - 100,000) / 100,000 = 4.18%.

What Is the Rate of Return to an Australian Investor