How would the profit figure change if the Australian dollar continues to strengthen at the same rate as it has done over the previous year?

by

Trading

A trader, who is considering uncovered interest arbitrage between the US dollar (USD) and Australian dollar (AUD), faces the following data:

  • Funds available: 2 million USD
  • Spot exchange rate: 0.94 AUD per USD
  • Spot exchange rate one year ago: 1.00 AUD per USD
  • USD 3-month interest rate: 0.12% per annum
  • AUD 3-month interest rate: 4.69% per annum

Required

(1) Calculate the profit that would be made if the exchange rate remains at its current level in three months’ time;

(2) How would the profit figure change if the Australian dollar continues to strengthen at the same rate as it has done over the previous year?