You have the following information:
- The spot rate (time 0 exchange rate) is GBP 1 = AUD 1.4925
- One-year interest rates on AUD and GBP are, respectively, 5.85% and 3.15%
- Assume that the spot rate in one year (the time 1 exchange rate) will be GBP 1 = AUD 1.5035
- The actual one-year forward rate is currently quoted as GBP 1 = AUD 1.5240
a) Calculate the synthetic forward rate from the AUD perspective.
b) Assume GBP 100,000 for the value of the contract. Calculate the value of the settlement payment and who will receive this settlement payment under the forward contract at time 1.
c) If you will be short AUD at time 1, would you choose the synthetic or actual forward rate at time 0? Explain why.
d) Calculate the AUD arbitrage profits available per GBP 100,000 sold in time 1.