Assume that you have $900,000 to invest.The current spot rate of the Australian dollar is $0.62,and the 180-day forward rate of the Australian dollar is $0.64.Furthermore,the 180-day interest rate in the United States is 3.5% and the 180-day interest rate in Australia is 3.0%.What is the net income you will have realized after 180 days if you conduct interest rate arbitrage?

Question

Quizplus · Accepted Answer

Step 1 - Exchange your dollars for Australian dollars. 11ea7fdb_fc39_7233_a768_834c7ffc48a0_TB2902_11 = 1,451,612.90 AUS
Step 2 - Account for the interest you earn over the 180 days.
1,451,612.90 × 1.03% = 1,495,161.29
Step 3 - Exchange Australian dollars back to USD.
1,495,161.29 × 0.64 = $956,903.23
Step 4 - Compute the profit from the transaction.
$956,903.23 - $900,000 = $56,903.23

Assume That You Have $900,000 to Invest