Problem $6\mathrm{.}4$

Currently, the spot exchange rate is $$0\mathrm{.}78$ per $A$$ and the one$-$year forward exchange rate is $$0\mathrm{.}74$ per $A$$$.$ One$-$year interest is $3\mathrm{.}5\%$ in

the United States and $4\mathrm{.}2\%$ in Australia. You may borrow up to $$1,000,000$ or $A$$$1,282,051,$ 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.

Required $A$

Required $B$

Required C

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.