Question 2

The CC Co. is a beverage company based in the United State. The company owns or licenses and markets more than 100 non-alcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages, such as waters, enhanced waters, juices and juice drinks, readyto-drink teas and coffees, and energy and sports drinks. It owns and markets a range of nonalcoholic sparkling beverage brands. The Companys segments include Europe, Latin America, North America. The company is planning to expand into Country X, situated in Southeast Asia, by acquiring a group of stores. The exchange rate for Country Xs currency is extremely volatile. Country Xs currency is in X$. Inflation is currently 40% a year. Inflation in the US is 4%% a year. Best estimates of the inflation rates show these rates are likely to continue for the foreseeable future. The current exchange rate of X$ currency is US$0.8313 to X$1. The 12-month exchange rate is $0.8447 to X$1. The annual interest rate of X is 1.19% and the dollar annual interest rate is 2.63%.

Required

(a) Explain the concept of arbitrage profits and why such profits may be available. Show the relevant calculations of any arbitrage opportunity available in the case above. (20 marks)