Consider the Following If the Market Futures Price Is 1

question 47

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 market futures price is 1.69 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:

Stock Split

A corporate action that increases the number of shares in a company, leading to a decrease in the price per share while keeping the market capitalization the same.

Shares Outstanding

The total number of company's shares that are currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares.

Owners' Equity

The residual interest in the assets of a company after deducting its liabilities, representing the ownership interest of shareholders.

Reverse Stock Split

A reduction in the number of a corporation's shares available for trade, intended to increase the market value of each share, without changing the company's market capitalization.