Question 3: You are an investor currently holding 1.5 million U.S. dollars, and you are contemplating the following strategies. 1) Investing in the U.S. 5-year treasury bonds. 2) Investing in the 5-year government bonds of one of the countries listed below. Your strategy is to exchange your funds on the spot market into the foreign currency, buy the local government bond, and after the bond's maturity, exercise a forward to change your funds back into USD. Spot and forward rates are listed below. There are no put and call rates (the spread is equal to zero). The forward, however, costs 2% of the exchanged value. Currency USD/EUR USD/GBP USD/INR USD/AUD USD/CAD USD/MXN USD/AED USD/JPY USD/CNY Spot rate 0.95 0.82 66.66 1.33 1.35 19.79 3.67 Forward rate (5 year) 0.9043 0.7615 84.6805 1.33 1.3834 20.7594 4.8841 106.5663 114.76 6.91 7.6145 USD risk free interest rate (annual rate, 5 year government bonds) 2.00% EUR risk free interest rate (annual rate, 5 year government bonds) 1.00% GBP risk free interest rate (annual rate, 5 year government bonds) 0.50% INR risk free interest rate (annual rate, 5 year government bonds) 7.00% AUD risk free interest rate (annual rate, 5 year government bonds) 2.00% CAD risk free interest rate (annual rate, 5 year government bonds) 2.50% MXN risk free interest rate (annual rate, 5 year government bonds) 5.00% AED risk free interest rate (annual rate, 5 year government bonds) 8.00% JPY risk free interest rate (annual rate, 5 year government bonds) 0.50% CNY risk free interest rate (annual rate, 5 year government bonds) 4.00% Required: 1. Find the most profitable strategy. Calculate the future and present values of all 11 strategies (U.S. treasury bonds and 10 foreign government bonds). [10 marks] 1. Find the most profitable strategy. Calculate the future and present values of all 11 strategies (U.S. treasury bonds and 10 foreign government bonds). [10 marks] 2. Explore the concept of arbitrage on the currency exchange markets and critically evaluate how it relates to this situation. [10 marks]