Consider the Following If the Market Futures Price Is 1

question 52

Multiple Choice

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

Gross Profit

The income a business earns after subtracting the expenses related to the production and sale of its goods, or the expenses incurred in delivering its services.

Net Income

The total profit of a company after all expenses, including taxes and costs, have been deducted from total revenue.

Supplies Used

The cost of supplies consumed during a specific period, often recorded as an expense on the income statement.

Expense

Expense is the cost of operations that a company incurs to generate revenue, encompassing everything from rent and salaries to utilities and materials.