Consider the following: $\begin{array}{lc}
\text { Risk-free rate in the United States } & \text { 0.04 / year } \
\text { Risk-free rate in Australia } & \text { 0.03 / year} \
\text { Spot exchange rate } &1.67A\$/\$\
\end{array}$

Assume the current market futures price is 1.66 A$/$. You borrow 167,000 A$, convert the proceeds to U.S. dollars, and invest them in the U.S. at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A$ at the current futures price (maturity of 1 year). What would be your profit (loss)?
A) Profit of 630 A$
B) Loss of 2300 A$
C) Profit of 2300 A$
D) Loss of 630 A$

Question

Consider the following: $\begin{array}{lc}
  \text { Risk-free rate in the United States } & \text {  0.04 / year } \
 \text { Risk-free rate in Australia } & \text {   0.03 /  year} \
  \text { Spot exchange rate } &1.67A\$/\$\
\end{array}$

Assume the current market futures price is 1.66 A$/$. You borrow 167,000 A$, convert the proceeds to U.S. dollars, and invest them in the U.S. at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A$ at the current futures price (maturity of 1 year). What would be your profit (loss)?
A) Profit of 630 A$
B) Loss of 2300 A$
C) Profit of 2300 A$
D) Loss of 630 A$

Quizplus · Accepted Answer

The arbitrage profit is calculated by comparing the future value of the investment in the U.S. with the cost of repurchasing the Australian dollars. The profit is 630 A$.

Consider the Following Assume the Current Market Futures Price Is 1