6. The 2-year interest rates in Australia and the U.S. are 7% and 5%. The spot exchangerate between the Australian dollar (AUD) and the US dollar (USD) is 0.6200 USD perAUD, and 2-year forward exchange rate is 0.6300.(3%) (a) Given spot exchange rate, what is the "right" 2-year forward exchange rate?(5%) (b) Is there arbitrage opportunity? If yes, please specify the detailed arbitrage strategy.Please10

The relative worth of two currencies, or the amount of one currency that may be exchanged for one…

Answered: (a) Given spot exchange rate, what is…

(a) Given spot exchange rate, what is the "right" 2-year forward exchange rate? (b) Is there arbitrage opportunity? If yes, please specify the detailed arbitrage strategy.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 4ST

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

6. The 2-year interest rates in Australia and the U.S. are 7% and 5%. The spot exchange
rate between the Australian dollar (AUD) and the US dollar (USD) is 0.6200 USD per
AUD, and 2-year forward exchange rate is 0.6300.
(3%) (a) Given spot exchange rate, what is the "right" 2-year forward exchange rate?
(5%) (b) Is there arbitrage opportunity? If yes, please specify the detailed arbitrage strategy.
Please
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