Let the spot rate between Australia and the US be 1.6 AUD/USD. The domestic Australian 6 month (annualised) interest rate is 4% and the 6 month (annualised) US interest rate is 1%.

Note: AUD stands for Australian dollar and USD stands for United States dollar.

(a) Use the money markets to calculate how many AUD it will cost today to have 100,000 USD available in the US in 6 months. You must show each transaction needed to guarantee the

funds are available in the US in 6 months.

(5 Marks)

BE630-6-SP/3

2. (b) What should the market quoted forward rate be to ensure there is no arbitrage opportunity?

   (5 Marks)

3. (c) If the actual 6-month forward rate was 1.7 AUD/USD, demonstrate how you can make an

arbitrage profit.