Q4 (30%) The following exchange rate and interest rate quotations are observed (A$=Australian Dollar; = Japanese Yen). Note that bid interest rate is your lending rate (i.e., rate of return of investment), while ask interest rate is your borrowing rate. Note: To obtain the effective 180-day interest rates, you can simply divide the quoted (per annum) interest rates by two. For example, the effective 180-day borrowing rate in \ is 1.75% (= 3.50%/2). FX quotes of vs. AS Spot 180-day forward Interest rates 180-days (% annum) A$ 5.75% X% 5.80% 3.50% Bid Ask \ 75.353/A$ \ 75.713/AS \ 73.810/A$ \ 74.010 /AS (i) Suppose you operate a company in Japan (where \ is your home currency) and would like to borrow. You are considering borrowing in \ or in A$ for 180 days. If you borrow in the foreign currency A$, you will hedge against any exchange rate risk by entering into a 180-day forward exchange rate contract so as to guarantee your cash flow. Where should you borrow to secure a lower financing cost? What is the effective borrowing rate in \ terms? Give your answer to the nearest 0.01%. (ii) If X = 3.40, is there any arbitrage opportunity? If yes, what steps must you take to profit from it? How much is the arbitrage profit in percentage of transaction amount? Give your answer to the nearest 0.01%. (iii) What is the range of the value of X that can ensure no arbitrage opportunity? Give your answer to the nearest 0.01%