An Australian company is considering a three month short-term investment of 10,0

Question

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 (deposit – loan) 4.75-5.25% p.a.

            Swiss three month LIBOR rate (deposit – loan)        2.25-2.75% p.a.

US three month LIBOR rate (deposit – loan)                        1.25-2.15% p.a.

            Australian lending/borrowing spread                          +1.5%p.a.

            Swiss lending/borrowing spread                                 +0.5%p.a.

US lending/borrowing spread                                      +0.2%p.a.

            WACC for company                                                  15%

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.

Explanation / Answer

A Answer: If invested in australia Amount= 10000AUD Interest rate for 3 month= 0.8125 Interest earned on amount deposited= 81.25 Amount at the end of 3 month= 10081.25 If invested in switzerland Amount= 10000AUD converted spot in CHF= 10000*1.0825 = 10825 CHF Interest rate for 3 months= 0.4375 % Interest earned= 47.35938 Amount at the end of 3 months= 10872.36 CHF Amount at the end of 3 month in AUD @ 1.0875= 11823.69 AUD Thus it is better to invest in switzerland. B answer If invested in australia Amount= 10000AUD Interest rate for 3 month= 0.8125 Interest earned on amount deposited= 81.25 Amount at the end of 3 month= 10081.25 AUD If invested in switzerland Amount= 10000AUD converted spot in CHF= 10000*1.0825 = 10825 CHF Interest rate for 3 months= 0.4375 % Interest earned= 47.35938 Amount at the end of 3 months= 10872.36 CHF Amount at the end of 3 month in AUD @ 1.0675= 11606.24 AUD Now also it is more profitable to invest in switzeland. C answer If invested in australia Amount at the end of 3 month= 10081.25 AUD If invested in switzerland Amount at the end of 3 month in AUD @ 1.0675= 11606.24 AUD Profit from investing in switzerland 1524.99 AUD

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