Brazilian real (the currency of Brazil) to US dollar exchange rate (BRLUSD) is currently quoted at 0.2570. The one-year US risk-free rate is 1% and the one-year Brazil risk-free rate is 14% (both expressed with continuous compounding). The current quoted one-year forward BRLUSD rate is 0.2300. Based on the above information, solve the following
1. What is correct about the spot BRLUSD exchange rate?
A) Brazilian real is currently worth 0.2570 US dollar.
B) US dollar is currently worth 0.2570 Brazilian real.
C) 3.891 US dollar is currently worth 1 Brazilian real.
D) None of the above
2. Theoretically, what should be the 1-year forward BRLUSD rate?
A) 0.1982
B) 0.2257
C) 0.2300
D) 0.2570
3. Which one is an arbitrage strategy that could be taken right now?
A) Borrow USD at 1% interest rate then convert to BRL right now; invest BRL for one year at 14%; after one year, convert BRL back to USD.
B) Borrow BRL at 14% interest rate then convert to USD right now; invest USD for one year at 1%; after one year, convert USD back to BRL.
C) Short the 1-year forward BRLUSD contract at 0.2300; buy back one-year later at whatever the spot rate that time.
D) None of the above