Consider the following: If the futures market price is 1.63 A$/$, how could you arbitrage?
A)Borrow Australian dollars in Canada convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Canadian dollars at the current futures price.
B)Borrow U.S.dollars in the United States, convert them to Canadian dollars, lend the proceeds in Canada, and enter futures positions to sell Australian dollars at the current futures price.
C)Borrow U.S.dollars in the United States, invest them in the U.S., and enter futures positions to purchase Canadian dollars at the current futures price.
D)Borrow Canadian dollars in Canada and invest them there, then convert back to U.S.dollars at the spot price.

Question

Consider the following:  If the futures market price is 1.63 A$/$, how could you arbitrage?
A)Borrow Australian dollars in Canada convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Canadian dollars at the current futures price. 
B)Borrow U.S.dollars in the United States, convert them to Canadian dollars, lend the proceeds in Canada, and enter futures positions to sell Australian dollars at the current futures price. 
C)Borrow U.S.dollars in the United States, invest them in the U.S., and enter futures positions to purchase Canadian dollars at the current futures price. 
D)Borrow Canadian dollars in Canada and invest them there, then convert back to U.S.dollars at the spot price.

Quizplus · Accepted Answer

The given code represents a currency pair AUD/CAD. The first part (11ead636_285c_a6c7_93a1_ad530a8462ad) represents the AUD/CAD spot rate and the second part (TB7045_00) represents the futures contract. As the futures market price is given as 1.63 A$/$, it means that the AUD is weaker than CAD in the futures market. To arbitrage, one can borrow U.S. dollars, convert them to Canadian dollars, lend the proceeds in Canada, and enter futures positions to sell Australian dollars at the current futures price. As the futures price is expected to converge with the spot price, the trader can earn a profit by buying back Australian dollars at a lower price in the future and converting them back to Canadian dollars.

Consider the Following: If the Futures Market Price Is