A hotel suite, Vienna
The Waldners, aristocratic but penniless, have allowed their younger daughter, Zdenka, to live as a boy so they can spend all available funds on marrying off her sister, Arabella. The “boy," known as Zdenko, wards off creditors while her mother consults a fortune-teller, who offers hope that a wealthy stranger may soon arrive to marry Arabella.
A young and impoverished officer, Matteo, who is desperately in love with Arabella, begs “Zdenko” to help him win her over; it’s that or suicide, he insists. He has no idea that the only love letter he has had from Arabella was in fact written by Zdenka, who secretly adores him.
Arabella’s three wealthy suitors have left her gifts, but she is unmoved, knowing that none of them is right for her, despite the pressure from her parents to decide. One of her admirers, Count Elemer, comes to take her sleigh riding, but she can only think of the stranger who gazed at her on the street earlier that morning.
Count Waldner has lost at cards again and, given Arabella’s refusal to accept any of her suitors, he sees no way out of their penury, and certainly has no time for his wife’s faith in her fortune-teller. Waldner had written to a wealthy army friend, Mandryka, enclosing a picture of Arabella, hoping the old man might be enticed by her. But now his friend’s nephew, also called Mandryka, arrives from his estates in the country. He is the stranger Arabella had seen earlier. His uncle is dead, but he has fallen in love with the image of Arabella from the letter and asks for Waldner’s permission to marry her. Unaware of this, Arabella is confused and despondent, knowing that by the end of the evening at the Coachman’s Ball she must make a choice of husband from her three suitors.
The Coachman’s Ball
Arabella has been told that the wealthy Mandryka has asked for her hand. As they are introduced at the ball, she realizes he is the stranger she had seen outside, and her love for him is immediate. He tells her of his first wife who died young and of how, in his loneliness, he fell in love with her portrait. Her confession of her family’s poverty means nothing to him and they make a solemn commitment to each other. Mandryka tells her that there is a tradition in his province that a young woman offers a glass of water to the man she wishes to marry. Arabella goes off for a final hour of dancing to say goodbye to her old life, while Mandryka delights her parents with orders of celebratory champagne.
Despairing at Matteo’s suicidal behavior, Zdenka secretly gives him the key to Arabella’s room, saying that her sister wants him to come to her later that evening. Mandryka overhears this and, fueled with drink, gives in to rage and jealousy. The Waldners are appalled at his behavior and demand that he return to the hotel to be assured of Arabella’s innocence.
The hotel lobby
Matteo, coming from his amorous encounter in Arabella’s room, is amazed to find her shortly afterwards in the lobby dressed for the ball. As Matteo demands, in the face of Arabella’s confused denials, that she admit their love for each other, the Waldners and Mandryka arrive from the ball. Angry accusations of betrayal on all sides are only resolved when a distraught Zdenka appears, no longer dressed as a boy, and confesses that she was the one who met with Matteo in Arabella’s room.
Arabella affirms her forgiveness of Mandryka’s refusal to trust her innocence with the offer of a glass of water.