An investor in Hong Kong considers trading a forward on Turkish Lira. The risk-free interest rates in Hong Kong and Turkey are 1% and 8% per annum, respectively. The spot exchange rate is 0.98 Hong Kong Dollar (HKD) per Turkish Lira (TRY). The 4-year forward exchange rate is 0.90 HKD per TRY. Is there an arbitrage? If so, what is the arbitrage profit today? (Consider an arbitrage strategy where we long or short the forward on 1 TRY and the net cash flow in year 4 is zero)

(a) $0.1153 (b) $0.1531 (c) $0.1593 (d) No arbitrage exists.

Consider a 3-year forward contract on stock. The stock will pay $5-dividend every year in years 1 through 3 and currently sells for $80. The forward will expire right after the stock's dividend payment in year 3. The forward price is $78, and the risk-free interest rate is 4% per annum. We want to make an arbitrage such that net cash flow in year 3 is positive and net cash flows from year 0 through year 2 are zero. In this arbitrage, what position do we need regarding 3-year zero-coupon bonds?

(a) buy 3-year bond such that we pay $70.58 now

(b) buy 3-year bond such that we pay $73.61 now

(c) sell 3-year bond such that we receive $70.58 now

(d) sell 3-year bond such that we receive $73.61 now