A position in a currency that is held at a certain cutoff time is deemed to be held overnight and so attracts interest. This cutoff time is 17:00 New York time. In particular, a minute before 17:00 is the end of day tand a minute after 17:00 is the start of next day t+1.

Consider the following exchange rates of AUDUSD and annualized interest rates at 16:55 on a given day. Does UIA exist over the short time interval of 16:55 to 17:05? Calculate the % arbitrage p.a. Show your work clearly with 6 decimal places.

Circle or highlight the following numbers (bid or ask) that you use, or you may not get any credit. Assume 365 days in a year and daily interest rate = annual rate/365.

Bid Ask

S_t = 0.8389 0.8390

E_t[S_t+1] = 0.8388 0.8390

i_US$ = 1.64% 1.69%

i_AU$ = 18.45% 18.53%

E_t[S_t+1] is expected exchange rate of day t+1 at time 17:05.

(Note: the data are hypothetical.)