The spot exchange rate is $0.56 per Brazilian real in American terms.Assume interest rates are continuously compounded.A US dollar invested in Treasury bonds grows to $1.0101 after ninety days.A real invested in risk-free Brazilian government Treasury securities grows to 1.0113 reals at the end of the same time period.A broker offers to trade a ninety-day forward contract to buy or sell 1 million reals at the exchange rate of $0.55 per real.The arbitrage profit that you can make today by trading one forward and other securities is approximately equal to:

Question

Quizplus · Accepted Answer

The arbitrage profit is calculated by comparing the forward rate with the rate implied by the interest rate parity. The implied forward rate is $0.56 * (1.0101/1.0113) = $0.5588. Since the broker offers $0.55, you can buy reals forward at a cheaper rate. The profit is (0.5588 - 0.55) * 1,000,000 = $8,800. However, considering the continuous compounding and precise calculations, the closest answer is $9,242.

The Spot Exchange Rate Is $0