2. Currently, the spot exchange rate is $0.72/A$ and the one-year forward exchange rate is
$0.68/A$. One-year interest is 3.5% in the United States and 4.2% in Australia. You may borrow
up to $1,000,000 or A$1,388,889, which is equivalent to $1,000,000 at the current spot rate.
a) Based on the given information, what would be the arbitrage profit you could make using
covered arbitrate to take advantage of these posted rates? Explain each transaction you
you would make and show all work for full credit.
b) What market forces would occur to eliminate further possibilities of covered interest
arbitrage?