Assume the exchange rate is such that a US dollar is currently worth A$1.15 (A$ is Australian dollars).
a. If a company is sourcing materials from Australia and is contracted to pay A$27.5 million next year, what is that equivalent in US dollars?
b. Suppose inflation in Australia is expected to be 2% while US inflation is expected to be 7% over the course of the next year. Use one of the theories from the chapter (and explain it) to predict what the value of a US Dollar will be in A$ at this time next year.
c. What will that do to our sourcing costs? (calculate the new number)
d. Suppose instead that we knew that Australian interest rates are 5.6% and U.S. interest rates are 4.4%. What would the Forward exchange rate have to be in order to make the return of investing in the U.S. equal to the covered return of investing in Australia?
e. What will that do to our sourcing costs? (calculate the new number)