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goldfiish [28.3K]
2 years ago
14

Currently, the spot exchange rate is $0.85/A$ and the one-year forward exchange rate is $0.81/A$. One-year interest is 3.5% in t

he United States and 4.2% in Australia. You may borrow up to $1,000,000 or A$1,176,471, which is equivalent to $1,000,000 at the current spot rate. How much can you realize certain profit in U.S. dollar terms? A) $48,025 B) $42,035 C) $50,625 D) $52,025 E) None of the above
Business
1 answer:
yarga [219]2 years ago
3 0

Answer:

B) $42,035

Explanation:

Calculation to determine How much can you realize certain profit in U.S. dollar terms

First step is to calculate the repayment liability after one year

Repayment liability = (A$1,176,471 × 1.042)

Repayment liability = A$1,225,882.78

Second step is to determine the investment yield

Investment yield = $1,000,000 ×(1+.035)

Investment yield = $1,000,000 × 1.035

Investment yield= $1,035,000

Third step is to convert the investment yield into A$ at the forward rate of the amount of $0.81

A $ to yield = $1,035,000 ÷ 0.81

A $ to yield= A$1,277,778.22

Now let determine How much can you realize certain profit in U.S. dollar terms

Arbitrage Profit=(A$1,277,778.22-$1,225,882.78)×0.81

Arbitrage Profit= A $51,895.44 × 0.81

Arbitrage Profit = $42,035

Therefore How much can you realize certain profit in U.S. dollar terms will be $42,035

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