An investor is planning to borrow 1 million Australian dollar (AUD) at an annual interest rate of 5.421%, and invest in (Nigerian) naira (NGN) at an annual interest rate of 8.802% for one year. No dealer is offering a direct exchange of Australian dollar for naira; however, the current exchange rate between the Australian dollar and the U.S. dollar is AUDUSD 0.7708 and between the U.S. dollar and the naira is USDNGN 357.
a. If the exchange rates after one year are still AUDUSD 0.7708 and USDNGN 357, calculate the return of this investment.
b. If the exchange rates after one year are AUDUSD 0.75 and USDNGN 350, calculate the return of this investment.
c. If the exchange rates after one year are AUDUSD 0.8 and USDNGN 400, calculate the return of this investment.
d. Calculate the break-even cross exchange rate between the Australian dollar and the naira (AUDNGN), i.e. the exchange rate that makes the return (or profit) of this investment zero.