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Question 924  foreign exchange rate, forward foreign exchange rate, arbitrage, forward interest rate, no explanation

The yield curve in the United States of America and Australia is flat. Currently, the:

  • USD federal funds rate is 1% pa;
  • AUD cash rate is 1.5% pa;
  • Spot AUD exchange rate is 1 USD per AUD;
  • One year forward AUD exchange rate is 0.97 USD per AUD.

You suspect that there’s an arbitrage opportunity.

Which one of the following statements about the potential arbitrage opportunity is NOT correct?

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