CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

The US\$ is currently selling for A\$1.2694. Interest rates in the U.S. and Australia are 3.5% and 4.25% respectively. If the US\$ is quoted at A\$1.2782 in the 1-year forward market, which of the following statements is TRUE?
A. Borrow money in the US, lend it in Australia and simultaneously sell the A\$ in the forward market for a guaranteed profit of \$0.0005 for every US\$ borrowed.
B. Borrow money in the US, lend it in Australia and simultaneously sell the A\$ in the forward market for a guaranteed profit of \$0.0003 for every US\$ borrowed.
C. Borrow money in Australia, lend it in the U.S. and simultaneously sell the US\$ in the forward market for a guaranteed profit of A\$0.0004 for every US\$ borrowed.
Explanation: Borrow one US\$ and convert it into A\$1.2694 in the spot market. Simultaneously sell the A\$ in the forward market at A\$1.2782/US\$. Invest in Australia and receive A\$1.3233 (= 1.2694 x 1.0425) after one year. Exercise the forward contract and sell A\$ to receive US\$1.0353 (= 1.3233 / 1.2782). In the meantime, the borrower will owe US\$1.035 (= 1 x 1.035), pocketing a difference of US\$0.0003 (1.0353 - 1.0350).