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

	Borrowing		Lending			Bid		Ask
$	5%		4.5%		Spot	$1.00 = 1.00		$1.01 = 1.00
	6%		5.5%		Forward	$0.99 = 1.00		$1.00 = 1.00

• Yes, borrow $1,000 at 5 percent; trade for at the ask spot rate $1.01 = 1.00; Invest 990.10 at 5.5 percent; hedge this with a forward contract on 1,044.55 at $0.99 = 1.00; receive $1.034.11.

  Incorrect

• Yes, borrow 1,000 at 6 percent; trade for $ at the bid spot rate $1.00 = 1.00; invest $1,000 at 4.5 percent; hedge this with a forward contract on 1,045 at $1.00 = 1.00.

• none of the options

• No; the transactions costs are too high.