Question: The spot exchange rate E = $0.95 US / FOREX. The U.S. interest rate is 2% per annum. The interest rate in the foreign country

The spot exchange rate E = $0.95 US / FOREX. The U.S. interest rate is 2% per annum. The interest rate in the foreign country is 3% per annum. A futures contract for delivery of 1 million units of the foreign currency one year from today is trading now at F = $0.92 US / FOREX. Which of the following is true? An arbitrage strategy:

Doesnt exist

Would involve buying the futures contract and borrowing in the foreign currency

Would involve selling the futures contract and borrowing in U.S. dollars.

Show your work to arrive at the choice above.

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