Will an arbitrageur facing the following prices be able to make money?

		Bid		Ask			Borrowing		Lending
S0($/)		$1.40-1.00		$1.43-1.00		i$	4.20%APR		4.10%APR
F360($/)		$1.44-1.00		$1.49-1.00		i	3.65%APR		3.50%APR

• Yes, borrow $1,000,000 at 4.2 percent; trade for at the spot ask exchange rate $1.43 = 1.00; invest 699,300.70 at 3.5 percent; hedge this by going SHORT in forward (agree to sell @ BID price of $1.44/ in one year). Cash flow in 1 year $237.76.

• No; the transactions costs are too high.

• none of the options

• Yes, borrow 1,000,000 at 3.65 percent; trade for $ at the bid spot rate $1.40 = 1.00; invest at 4.1 percent; hedge this with a long position in a forward contract.