Determine if irp holds between australia and united states, Financial Management

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Determine if irp holds between australia and united states

Currently, the spot exchange rate is $0.75/A$ and the one-year forward exchange rate is $0.70/A$. 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$1,333,333, which is equivalent to $1,000,000 at the current spot rate.

a. Determine if IRP holds between Australia and United States.

b. If IRP doesn’t hold, explain in detail how you would realize certain profit in US dollar terms.

c. Explain how IRP will be restored as a result of the arbitrage transactions you carry out above.

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