Consider the Following -If the Futures Market Price Is 1

question 45

Multiple Choice

Consider the following: $$\begin{array} { | l | l | } \hline \text { Risk-free rate in the United States } & 0.04 \text { year } \\\hline \text { Risk-free rate in Australia } & 0.03 / \text { year } \\\hline \text { Spot exchange rate } & 1.67 \mathrm { A } \$ /\$ \\\hline\end{array}$$
-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 and 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:

Inventory Cost Flow

A method used to value and manage inventory, determining the cost of goods sold and ending inventory.

Industry Standards

Established norms or criteria within an industry that act as benchmarks for quality, safety, and performance.

Domestic Operations

Business activities and transactions that occur within a company's home country.

FIFO

"First In, First Out," an inventory management and valuation method assuming the first items acquired are the first ones sold.