Reference no: EM132907535

One year later, you are considering to move to New York to pursue a career in Wall Street. You check the exchange rates quoted by the same FX dealer at the airport. To your surprise, the rates have dramatically changed, thanks to an expansion of the money supply in the US.

The following quotes are provided by a Foreign Exchange (FX) dealer at the airport.

                   BUY            SELL

USD          0.8632      0.8590

Problem 1: What conclusions about the strength of the Australian dollar can be drawn from comparing the current exchange rates with one year ago? Will you receive more or less USD if you exchanged the same amount of money as you did one year ago?

Problem 2: Explain the concept of inflation. Include in your answer how relative inflation rates may impact the exchange rate between the AUD and USD, by referring to Purchasing Power Parity (PPP) theory.

Problem 3: Classify the following transactions as either:

(i) Primary or secondary market

(ii) Money or capital market

(iii) Wholesale or retail market, and

(iv) Direct or indirect market.

Transaction 1: The Australian government issues new 10-year bonds totalling $500 000.

Transaction 2: An investor sells their 10-year Australian government bonds that mature in 7 years for $50 000.