Question: A trader is considering uncovered interest arbitrage between the US dollar (USD) and Australian dollar (AUD), faces the following data: Funds available: 2 million USD

A trader is considering uncovered interest arbitrage between the US dollar (USD) and Australian dollar (AUD), faces the following data:

Funds available: 2 million USD

Spot exchange rate: 0.94 AUD per USD

Spot exchange rate one year ago: 1.00 AUD per USD

USD 3-month interest rate: 0.12% per annum

AUD 3-month interest rate: 4.69% per annum

if the exchange rate remains at its current level in three months time his profit will be USD 22,850.

How would the profit figure change if the Australian dollar continues to strengthen at the same rate as it has done over the previous year?

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