Problem:
Suppose that the riskfree interest rates in Australia and Japan are 6% p.a. and 2% p.a., respectively. The AUD/JPY spot rate is 70.00 and the AUD/JPY oneyear forward rate is 68.00. Based on this situation do any arbitrage opportunities exist? If so, explain what these arbitrage opportunities are and outline the steps you would take to exploit them. Calculate the arbitrage profit that you could earn on AUD 1,000,000, or its JPY equivalent. If no arbitrage opportunities exist then explain why they do not exist. With all calculations.