Consider an Australian financial institution which has two liablities, which both mature in one year from now.

Liability 1 is a payment obligation of 110 AUD in one year from now.

Liability 2 is a payment obligation of 84 USD in one year from now.

The US liability rate is 5% and the Australian liability rate is 10%.

a)Calculate the present value of the payment obligations in the currency of denomination. The current exchange rate is 0.8 USD for 1 AUD.

In one year from now there are three different potential exchange rates.

0.9 USD for 1 AUD0.8 USD for 1 AUD0.7 USD for 1 AUD

b)Calculate the present value of the payment obligations in AUD.

c)Calculate the AUD return on the USD investment for all three exchange rate scenarios.

d)Calculate the weighted AUD return on the liabilities in all three scenarios.

The financial institution has two different investment opportunities.

Asset 1 is denominated in AUD and pays 120 AUD in one year from now.

Asset 2 is denominated in USD and pays 96 USD in one year from now. The US asset rate is 20% and the Australian asset rate is 20%.

e)The financial institution invests 100 AUD in Asset 1 and 100 AUD in Asset 2. Calculate the weighted AUD return on the assets in all three scenarios.

f)The financial institution invests 100 AUD in Asset 1 and 100 AUD in Asset 2. Calculate the profit in AUD in all three scenarios. Does the profit depend on the exchange rate?

g)How should the financial institution split the 200 AUD investment between assets 1 and 2, such that the profit does not depend on the exchange rate?