Final answer:
The best riskless arbitrage opportunity would be to buy the foreign currency at the spot rate and invest in the foreign risk-free rate due to the interest rate differential and future conversion back into domestic currency at the locked-in forward rate.
Step-by-step explanation:
The question is about assessing different riskless arbitrage opportunities given the available spot exchange rate, forward rate, and the domestic and foreign risk-free rates. To determine if there is an arbitrage opportunity, we need to compare the interest rate differentials with the forward rate differential. When the interest rate on the domestic currency is lower than the interest rate on the foreign currency, the forward rate should be higher than the spot rate, which compensates for the higher interest earned by investing in the foreign currency. However, if the forward premium or discount does not correctly reflect the interest rate differential, arbitrage opportunities may arise.
In this situation, option (c) Buy the foreign currency at the spot rate and invest in the foreign risk-free rate could potentially offer a riskless arbitrage opportunity. This is because you could benefit from the higher foreign risk-free rate compared to the domestic rate, and later convert the investment back into domestic currency at the initially locked-in forward rate, securing a gain if the interest differential is not fully reflected in the forward rate.