A forex trader wants to earn arbitrage gain. He receives following data and quotes from the forex. and money market: Spot rate of US $ ₹43.30/$ 6 Month forward rate of US. $ ₹43.70/$ Annualised interest rate for 6 months

Spot rate = ₹43.30/$ Forward Premium = $\frac{43.70-43.30}{43.30}\times\frac{12}{6}\times100=1.85\%$ Annualised interest rate for 6 months (₹) = 8% Annualised interest rate for 6 months (US$) = 4% Interest rate differential = 8% - 4% = 4% Since the interest rate differential is positive in India (8%) and greater than forward premium (1.85%), there is a possibility of arbitrage inflow into India. The advantage by using Money Market arbitrage possibility can be analysed as follows: Step I: Borrow US $ 1 Million for 6 months @4% Amount repayable after 6 months along with interest = $1 million + ($1 million x 4 / 100 x 6/12) = $1.02 million Step II: Convert US $ 1 Million into rupees and get the principal amount of ₹43.30 million deposited @ 8% for 6 months Total amount at the end of 6 months = ₹43.30 million + (₹43.30 million x 8/100 x 6/12) = ₹45.032 million Step III: Converting the total amount at forward rate and repay the $ borrowed = ₹45.032 million / 43.70 = $1.030481 million Net gain = ($1.030481 million - $1.020 million) = $0.010481 million = US $10481 or ₹4,58,020