Which one of the following formulas illustrates the mechanics of covered interest arbitrage? Assume the $1 is borrowed and S0 = spot rate; F1 = one-year forward rate; RF = foreign country risk-free rate; and RUS = U.S.risk-free rate.

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Covered interest arbitrage involves borrowing in one currency, converting that currency to another currency, investing the proceeds in that currency for one year, then converting it back to the original currency using the one-year forward exchange rate. The goal is to generate a risk-free profit based on the interest rate differential between the two currencies. In this formula, the $1 is multiplied by the spot exchange rate (S₀), then multiplied by (1 + RF) / (1 + RUS) to get the amount of foreign currency obtained. This foreign currency is then invested for one year, earning interest at the foreign risk-free rate, RF. At the end of the year, the investment is worth (1 + RF) times its original value. This amount is then divided by the one-year forward exchange rate (F₁) to give the amount of U.S. dollars received. Finally, the U.S. dollars are used to repay the original loan, with interest at the U.S. risk-free rate, RUS. Therefore, the formula is $1 × S₀ × (1 + RF)/(1 + RUS) / F₁ - $1 × (1 + RUS).

Which One of the Following Formulas Illustrates the Mechanics of Covered