Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 profits in Australian dollars. Hint: outline all investment steps and show all calculations. Do not forget to pay the principal and interests on 20 May 2019.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Practical Financial Management

Authors: William R. Lasher

8th edition

1305637542, 978-1305887237, 1305887239, 978-1305637542

More Books

Students also viewed these Finance questions