1. The finance manager of USQ Limited has a surplus of AUD 1 million and is interested in using this money for triangular arbitrage. The Finance manager can either buy or sell at the quotes given below.

Citibank 1 AUD = 0.76 USD

Westpac 1 AUD = 1.05 NZD

NAB 1 USD = 1.39 NZD

Suppose we ignore all transaction costs. Show step by step how triangular arbitrage is possible using these quotes and show the resulting arbitrage profit. In your answer you must show the relevant cross rates which lead to the decision to undertake triangular arbitrage. Show all calculations to support your answer.

2. The finance manager has now been tasked with investing AUD 5 million (or US dollar equivalent) for a period of ninety (90) days i.e. three (3) months. Facing the rates shown in the table below, the finance manager wishes to enter into a covered interest arbitrage (CIA) investment.

Spot exchange rate	S (USD/AUD)	=	0.7102/AUD
90-day forward rate	F90 (USD/AUD)	=	0.6713/AUD
AUD discount rate	iAUD	=	6.00% p.a.
US dollar Discount rate	iUSD	=	4.00% p.a.

In your answer, you should show clearly the following:

i) the calculations that demonstrate that Interest Rate Parity does not hold;

ii) the resulting CIA profit using any relevant calculations.

If you wish, you can use a diagram to show your answer.