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Suppose the CFO of an American corporation with surplus cash flow has $90 million to invest and the corporation does not believe it will need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1 year CD deposits in US banks is .5 %, while the rate on 1 year CD deposits (denominated in Australian dollars) is currently 2.5 %. Suppose further that the exchange rate currently is (.8) Australian Dollars per US $.

What must the CFO expect about the Australian Dollar/US$ exchange rate 1 year from now if she chooses to invest in the US $ CD's instead of the Australian CD's?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M938834

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