schweser exam vol 1 - 2-pm #120

Regarding arbitrage, this question asking using $1000 borrowed money to calculate arbitrage profit when spot is $2/BRU, 1 year fwd is $2.1/BRU, US Rf=5%, BRU Rf=3%. The answer saying using $1000 to buy 500 BRU, then enter into fwd contract. At the end it’ll have 515 BRU, use fwd rate of $2.1 to get $31.5 profit. The thing is it didn’t specify how many contract to sell at the beginning. If you end up 515BRU at the end, I think you can only use fwd rate on 500 BRU, the rest 15BRU has to use lower spot rate at 1 year end. Does this make sense? Thanks.

i just used the arbitrage equation: 1.05 vs (2.10/2.0)*1.03 = 1.0815 left side is lower, so borrow USD profit = (1.0815 - 1.05) * $1,000 = 31.50