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% for one year.What are 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 FI sells A$100 million for US dollars at an exchange rate of A$1.10 to US $1.00, which gives them US$90.91 million. If they invest this at an interest rate of 12% for one year, they will receive interest of US$10.91 million, which when converted back to Australian dollars at the original exchange rate of A$1.10 to US $1.00, gives them A$12.00 million. Adding this to the original A$100 million they sold, the Australian dollar proceeds from the US dollar investment is A$101.82 million.

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