The current exchange rate between the US and Australian Dollar is $0.7700/A$.

There is an expectation that the US Dollar will appreciate by 4% against the Australian Dollar over the year.

Company A is a US firm, and Company B is an Australian firm. They are involved in the foreign exchange market for two different reasons.

Company A has $1m cash on hand. It plans to take a one-year loan amounting to $2.5m from a US bank with an interest rate of 5% per annum. It will then invest the cash on hand and the loan amount into the Australian market for a year. The Australian market provides an interest rate of 10% per annum. The company expects that converting the US Dollar now to the Australian Dollar will allow it to grow at the stated investment rate for a year, and then converting the Australian Dollar back to the US Dollar will benefit them even after repaying the US Dollar-denominated loan.

Company B plans to buy a US Asset valued at $3.5m after a year. The US Dollar is expected to appreciate, but the percentage change is uncertain. The company worries about how much it must pay in Australian Dollars to cover the US Dollar purchase price. So, it creates a contract with an Australian Bank to purchase $3.5m at an exchange rate of $0.7900/A$ after a year.

i. Are both companies' strategies, i.e., investment decision by Company A and risk reduction approach by Company B, beneficial to them? Show all relevant calculations?

ii. How will the companies be affected if the US Dollar depreciates rather than appreciates against the Australian Dollar after a year?