An Australian company is considering a three month short-term investment of 10,000AUD in either Australia or Switzerland. The following information is available
Initial spot exchange rate (AUD/CHF) 1.0775-1.0825
Australian three month LIBOR rate 4.75-5.25% p.a.
Swiss three month LIBOR rate 2.25-2.75% p.a.
Australian lending/borrowing spread +1.5%p.a.
Swiss lending/borrowing spread +0.5%p.a.
Required:
(a) If the ending spot exchange rate (AUD/CHF) is expected to be 1.0875-1.0925, which financing option should be taken.
(b) If the ending spot exchange rate turned out to be (AUD/CHF) 1.0675-1.0725, would your decision have been profitable.
(c) Determine the profit or loss from your decision.