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Determine whether aussie rate is direct-indirect quotation

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Based on the following information, answer the following questions.

Assume you are an American trader and own $100,000. Today's spot Aussie rate (AUD/USD) is 0.6520/24 and the Cable rate (GBP/USD) is 1.2349/53. Today's observed cross rate for GBP/AUD is 1.8926/43.

The interest rate in Australia is currently 5.76% p.a. and the interest rate in the United Kingdom is 8.16% p.a. All interest rates are discretely compounded.

Questions:

1. Determine whether the Aussie rate is a direct or indirect quotation for you. Then calculate the cross rate of GBP/AUD. Then, determine whether arbitrage opportunities exist or not. Show all your workings step by step (start with $100,000).

2. Assume no triangular arbitrage opportunity exists. Also assume you can borrow an additional 50,000 AUD and invest in GBP. Using today's spot rate as the best predictor of the spot rate one month from now. What strategy can you use? And what is the expected rate of return from your strategy in one month? Show all your workings step by step.

Reference no: EM133495859

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