Assume an FI sells A$100 million for US dollars on the spot currency markets at an exchange rate of A$1.10 to US $1.00 and invests the US dollar assets at an interest rate of 12 per cent for one year. What is the Australian dollar proceeds from the US dollar investment (round to two decimals)?
A) A$100.00 million
B) A$112.00 million
C) A$90.91 million
D) A$101.82 million

Question

Quizplus · Accepted Answer

The US dollar received from selling A$100 million would be: 
US dollars = A$100 million / A$1.10 = US$90.91 million
After investing the US dollars for one year at an interest rate of 12%, the proceeds in US dollars would be:
US dollars = US$90.91 million x (1 + 0.12) = US$101.82 million
Converting the US dollars back into Australian dollars at the original exchange rate gives:
Australian dollars = US$101.82 million x A$1.10/US$1 = A$112.00 million (rounded to two decimals)

Assume an FI Sells A$100 Million for US Dollars on the Spot