Homework Answers
Interest rate in AUD is lower. so, borrow 120,000 AUD and invest it in USD because USD has higher interest rate.
Interest to be paid after one year on AUD borrowed = AUD 120,000*4% = AUD 4,800
Convert AUD to USD using spot exchange rate and invest.
USD investment value = AUD 120,000*0.73 = USD 87,600
Interest to be received after one year on USD investment = USD 87,600*6% = USD 5,256
Convert USD interest received using exchange rate after one year.
interest received in USD converted to AUD = USD 5,256/0.73 = AUD 7,200
Carry trade profit in AUD = interest received in USD converted to AUD - Interest to be paid after one year on AUD borrowed
Carry trade profit in AUD = AUD 7,200 - AUD 4,800 = AUD 2,400
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The spot rate given is AUDUSD
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Selling AUD proceeds at forward price. Can arbitrage profit be
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