A, Assume that today is 21 March 2019. Today, you observe that the exchange rate between AU$ and the US$ is 1.319,EAU$/US$=1.319, the 90-day interest rate in Australia is 0.50%, the 90-day interest rate in the US is 0.22%, and the 90-day forward rate is 1.376,FAU$/US$=1.376. Note that the covered interest parity does not hold here. Explain how you can make risk free profits using spot and forward markets in 90 days, on 20 May 2019, if you can either borrow AU$1.319 million Australian dollars or borrow US$1 million dollars with the interest rates above today. The answer should have the exact amount of profitsin Australian dollars. Hint: outline all investment steps and show all calculations. Do not forget to pay the principal and interests on 20 May 2019.

B. Using diagrams explain what will happen to the current spot exchange rate (increase, decrease, or no change) if the forward rate in (A) and the nominal interest rates in two countries remain the same (the answer should have the change in the demand for or the supply of euros in the foreign exchange market and also the value of the for new exchange rate).