$***$Just number $3***$

$2.$ Consider the following data:

Spot on Australian Dollars $($AUD$)$: USD$/$AUD $=1\mathrm{.}5482$

one$-$month forward rate: $US\frac{D}{A}UD=1\mathrm{.}5491$

$30-$day US Treasury rate: $5\mathrm{.}49\%$ p$.$a$.$

$30-$day Australian cash rate: $4\mathrm{.}35\%$ p$.$a$.$

Evaluate the following strategy:

a$.$ Borrow $$100,000$ at the $30-$day US Treasury rate and convert to AUD at spot

b$.$ Invest the AUD for $30$ days at the Australian cash rate

c$.$ Sell the AUD with a $30-$day forward contract

d$.$ Use the proceeds to pay off the original loan

Based on the above, does interest rate parity hold? Or$,$ does an arbitrage profit exist in either

transaction? Calculate the deviation, if any, from parity. $($Use $30$ and $365$ days for your

calculations and continuous compounding$).$

$3.$ An investor is interested in using the AUD in a trading strategy. If we used the spot exchange

rate and the two interest rates in Problem $2,$ what would a $30-$day forward price be on an

AUD contract? $($Use $30$ and $365$ days in your calculation for time and continuous

compounding$).$ How close is it to the actual number in problem $2?$