Currently, the spot exchange rate is $$0\mathrm{.}69$ per $A$$ and the one$-$year forward exchange rate is $$0\mathrm{.}65$ per $A$$$.$ One$-$year interest is $3\mathrm{.}5\%$

in the United States and $4\mathrm{.}2\%$ in Australia. You may borrow up to $$1,000,000$ or $A$$$1,449,275,$ which is equivalent to $$1,000,000$ at the

current spot rate.

Required:

a$.$ Determine if IRP is holding between Australia and the United States.

b$.$ If IRP is not holding, explain in detail how you would realize certain profit in U$.$S$.$ dollar terms. What will be your arbitrage profit?

c$.$ Explain how IRP will be restored as a result of arbitrage transactions you carry out above.

Complete this question by entering your answers in the tabs below.

If IRP is not holding, explain in detail how you would realize certain profit in U$.$S$.$ dollar terms. What will be your arbitrage

profit?

Note: Do not round intermediate calculations. Round your final answer to nearest whole dollar.

Profit in U$.$S$.$ dollar terms

Arbitrage profit

Borrow in Australia and invest in the U$.$S$.$ Hedge exchange rate risk by buying Australian dollars

forward.

Borrow in Australia and invest in the U$.$S$.$ Hedge exchange rate risk by selling Australian dollars

forward.

Borrow in the U$.$S and invest in Australia. Hedge exchange rate risk by buying Australian dollars

forward.

Borrow in the U$.$S$.$ and invest in Australia. Hedge exchange rate risk by selling Australian dollars

forward.