You observe the following current quotes on the Chinese yuan (CNY) and

the Hong Kong dollar (HKD) exchange rates and interest rates.

CNY/HKD (Base Currency/Quote Currency) Bid Ask

Spot 1.0939 1.0945

3-Month Forward 1.0811 1.0823

3-Month Interest Rate (per annum) Bid Ask

CNY 3.85% 4.23%

HKD 0.86% 0.91%

1. (1 Points) Does an arbitrage opportunity exist?

2. (9 Points) If so, outline an arbitrage strategy and explain step by step

why your strategy yields risk-free profits.