The spot rate between Canada and the U.S. is Can$1.2452/$, while the one-year forward rate is Can$1.2451/$. The risk-free rate in Canada is 4.67 percent and risk-free rate in the United States is 2.78 percent. How much in profit can you earn on $13,000 utilizing covered interest arbitrage?
Answer-
Given
Spot rate = Can $ 1.2452 / $
One year forward rate = Can $ 1.2451 / $
Risk free rate is Canada ( R Can) = 4.67 % =
0.0467
Risk free rate in United States ( R US)= 2.78 % =
0.0278
Forward rate = Spot rate x [ ( 1 + R Can) / (1 + Ran US) ]
Forward rate = Can $ 1.2452 x [( 1 + 0.0467) / ( 1 + 0.0278) ]
Forward rate = Can $ 1.2452 x ( 1.0467 / 1.0278)
Forward rate = Can $ 1.2452 x 1.018389
Forward rate = Can $ 1.2681
Therefore the difference = Can $ 1.2681 - Can $ 1.2451 = Can $ 0.023 / $
The profit that can be earned on $ 13000 utilized coverage interest arbitrage = $ 299
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