Currently, the spot exchange rate is $0.85/A$ and the one-year forward exchange
rate is $0.81/A$. 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$1,176,471, which is equivalent
to $1,000,000 at the current spot rate.
a. Determine if IRP is holding between Australia and the United States.
b. If IRP is not holding, explain in detail how you would realize certain profit in
U. S. dollar terms.
c. Explain how IRP will be restored as a result of the arbitrage transactions you
d. carry out above.
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