IFE, Cross Exchange Rates, and Cash Flows Assume the value of the Hong Kong dollar (HKs) is tied to the U.S. dollar and will remain tied to the U.S. dollar. Assume that interest rate parity exists. Today, an Australian dollar (A$) is worth $0.50 and HK$ 3.9. The one-year interest rate on the Australian dollar is 11 percent, whereas the one-year interest rate on the U.S. dollar is 7 percent. You believe in the international Fisher effect.
You will receive A$1 million in one year from selling products to Australia, and will convert these proceeds into Hong Kong dollars in the spot market at that time to purchase imports from Hong Kong. Forecast the amount of Hong Kong dollars that you will be able to purchase in the spot market one year from now with A$1 million. Show your work.
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