Consider the Following If the Futures Market Price Is 1

question 9

Multiple Choice

Consider the following: $\begin{array}{lc} \text { Risk-free rate in the United States } & \text { 0.04 / year } \\ \text { Risk-free rate in Australia } & \text { 0.03 / year} \\ \text { Spot exchange rate } &1.67A\$/\$\\\end{array}$
If the futures market price is 1.63 A$/$, how could you arbitrage?

• A) Borrow Australian dollars in Australia, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Australian dollars at the current futures price.
• B) Borrow U.S. dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price.
• C) Borrow U.S. dollars in the United States, invest them in the U.S., and enter futures positions to purchase Australian dollars at the current futures price.
• D) Borrow Australian dollars in Australia and invest them there, then convert back to U.S. dollars at the spot price.
• E) There is no arbitrage opportunity.

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Definitions:

Mean-Variance Efficient

Mean-Variance Efficient describes an investment portfolio which maximizes returns for a given amount of risk or minimizes risk for a given level of expected return.

Single-Index Structure

A model in finance that relates the return of an asset to a single market index, representing the asset's sensitivity to movements in the market.

Covariances

A measure of how two variables move together, indicating the degree to which they are related.

Regression Equation

An equation that represents the relationship between a dependent variable and one or more independent variables.