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Adam has saved C$1,000 and plans to go surfing in Australia next summer
Adam has saved C$1,000 and plans to go surfing in Australia next summer. He won't need the money for a year, so he decides to invest it. Adam could invest the money in Canada, where a T-bill will earn 4.5 percent, and then convert it to Australian dollars (AU$) just before he leaves. Alternatively, Adam could convert the funds today and invest in an Australian T-bill earning 5.2 percent. Which approach should he take if the currency spot rate is C$0.90431/AU$ and the one-year forward rate is C$0.89829/AU$?
Expert Solution
Step-by-step solution.
Option 1. First invest then convert
Total investment at the year end
= $1,0000*1.045
=$1,045
Total amount after conversion
=$1,045/0.89829
=AU$1,163.32
Option 2. First convert then invest
Total amount of money converted,
=$1,000/0.90431
=AU$1,105.82
Total investment at the year end
=$1,152.82*1.052
=AU$1,163.32
Reference
Adaba, G. B., Ayoung, D. A., & Abbott, P. (2019). Exploring the contribution of mobile money to well?being from a capability perspective. The Electronic Journal of Information Systems in Developing Countries, 85(4), e12079.
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