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Use the following information for the next 2 questions. Assume that the U.S. one-year interest rate is 8% and the one-year interest rate on Australian dollars is 13%. The U.S. annual inflation is expected to be 5%, while the Australian annual inflation is expected to be 7%. The current spot exchange rate of an Australian dollar is $0.689. You have $100,000 to invest for one year. Question 4 (6.25 points) You believe that IFE holds. What will be the yield on your investment if you invest in the Australian market? (HINT: You believe that IFE holds, so the spot rate one year later is the rate obtained from IFE. Note that the interest rate given in the problem is the nominal rate.) 13.00% 8.00% 18.23% 7.16%

Use the following information for the next 2 questions. Assume that the U.S. one-year interest rate is 8% and the one-year interest rate on Australian dollars is 13%. The U.S. annual inflation is expected to be 5%, while the Australian annual inflation is expected to be 7%. The current spot exchange rate of an Australian dollar is $0.689. You have $100,000 to invest for one year. Question 4 (6.25 points) You believe that IFE holds. What will be the yield on your investment if you invest in the Australian market? (HINT: You believe that IFE holds, so the spot rate one year later is the rate obtained from IFE. Note that the interest rate given in the problem is the nominal rate.) 13.00% 8.00% 18.23% 7.16%

International Financial Management
International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter7: International Arbitrage And Interest Rate Parity
Section: Chapter Questions
Problem 49QA
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Use the following information for the next 2 questions. Assume that the U.S. one-year interest rate is 8% and the one-year interest rate on Australian dollars is 13%. The U.S. annual inflation is expected to be 5%, while the Australian annual inflation is expected to be 7%. The current spot exchange rate of an Australian dollar is $0.689. You have $100,000 to invest for one year. Question 4 (6.25 points) You believe that IFE holds. What will be the yield on your investment if you invest in the Australian market? (HINT: You believe that IFE holds, so the spot rate one year later is the rate obtained from IFE. Note that the interest rate given in the problem is the nominal rate.) 13.00% 8.00% 18.23% 7.16%
Transcribed Image Text:Use the following information for the next 2 questions. Assume that the U.S. one-year interest rate is 8% and the one-year interest rate on Australian dollars is 13%. The U.S. annual inflation is expected to be 5%, while the Australian annual inflation is expected to be 7%. The current spot exchange rate of an Australian dollar is $0.689. You have $100,000 to invest for one year. Question 4 (6.25 points) You believe that IFE holds. What will be the yield on your investment if you invest in the Australian market? (HINT: You believe that IFE holds, so the spot rate one year later is the rate obtained from IFE. Note that the interest rate given in the problem is the nominal rate.) 13.00% 8.00% 18.23% 7.16%
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