Assume the following: Spot rate AUD1.437 = EUR1, 180-day forward rate AUD1.425 = EUR1, AUD interest rate 3.5% p.a., EUR interest rate 4.5% p.a. As an arbitrageur (seeking a riskless profitable opportunity), you are authorised to use (borrow) either AUD 2 million or EUR 2 million. What is your best arbitrage strategy? (I need working out also please!)

Answers:

A.You should borrow EUR and invest in AUD and receive a profit of EUR 7,077.

B.You should borrow AUD and invest in EUR and receive a profit of AUD 7,077.

C.You should borrow EUR and invest in AUD and receive a profit of EUR 7,137.

D.You should borrow AUD and invest in EUR and receive a profit of AUD 7,137.