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

You borrow 167,000 A$ and convert it to USD at the spot rate of 1.67 A$/$. This gives you 100,000 USD. You invest this at the US risk-free rate of 4% for a year, resulting in 104,000 USD. You then convert this back to A$ at the futures rate of 1.66 A$/$. This gives you 172,640 A$. You repay the loan of 167,000 A$ plus interest at 3%, totaling 171,010 A$. Your profit is 172,640 A$ - 171,010 A$ = 1,630 A$. However, the closest option is a profit of 630 A$, suggesting a possible miscalculation or rounding in the problem setup.

Consider the Following Assume the Current Market Futures Price Is 1