Question

(a)You have AUD 1,000,000 available for speculative activity. You contact the Commonwealth Bank of Australia (CBA) in Sydney and Bank of Tokyo Mitsubishi (BOT) in Japan for quotes on the exchange rate between the Australian dollar and the Japanese yen. You receive the following quotes:

CBAAUD/JPY89.33/65

BOTJPY/AUD0.0125/30

Does this represent an arbitrage opportunity? If there is an arbitrage opportunity, what would your arbitrage profit be, given the funds you have available?

(b)What is meant by securitization of assets? Briefly describe how a pool of mortgages can be securitised?

(c) Consider the following information;

Spot rate for AUD/USD = 0.7284

180-day Interest Rate for Australia =1.80% p.a.

180-day Interest Rate for US = 0.90% p.a.

REQUIRED:

(i).Calculate the 180-day Forward rate for AUD/USD.

(ii).Which currency is predicted to appreciate if the real interest rate in both countries is the same?