Interest Rate Arbitrage You observe that the NZD/USD spot exchange rate (i

Subject:FinancePrice:2.87 Bought7

Share With

Interest Rate Arbitrage

You observe that the NZD/USD spot exchange rate (i.e., the price of 1 New Zealand Dollar in terms of U.S. Dollars) is 0.7234 and the 3-month NZD/USD forward exchange rate is quoted at 0.7212.

Does an arbitrage opportunity exist given that the 3-month deposit rates in New Zealand and the U.S. are 0.35% and 0.08% per annum, respectively? If so, outline an arbitrage strategy and explain step-by-step why your strategy yields risk-free profits.