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Suppose that the two-year interest in Australia and the United States are 3% and 2% respectively, and the spot exchange rate is 0.75 USD per

Suppose that the two-year interest in Australia and the United States are 3% and 2% respectively, and the spot exchange rate is 0.75 USD per AUD.

  1. What is the fair value of the two-year forward exchange rate?
  2. Suppose that the two-year forward exchange rate is 0.70. Demonstrate the presence of an arbitrage opportunity and calculate its profit.

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