Question

v The New Zealand interest rate is 1.10%, and the Australian interest rate is 2.50%, both...

v

The New Zealand interest rate is 1.10%, and the Australian interest rate is 2.50%, both with continuous compounding. The exchange rate is 1 AUD = 0.9800 NZD. You are offered a 3 year forward contract where you pay 0.8897 NZD for 1 AUD. What is the arbitrage opportunity?

Borrow Australian dollars, invest in NZ dollars, close out with a long forward.

Borrow NZ dollars, invest in Australian dollars, close out with a long forward.

Borrow NZ dollars, invest in Australian dollars, close out with a short forward.

Borrow Australian dollars, invest in NZ dollars, close out with a short forward.

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