Question

1. Assume the following information:

                                                                                                         Quoted Price

            Spot rate of Canadian dollar                                                 $.8405/C$

            90‑day forward rate of Canadian dollar                                $.8385/C$

            90‑day Canadian interest rate (a periodic rate)                     1.85%

            90‑day U.S. interest rate ( a periodic rate)                            1.75%

1. Given this information, who has a covered interest arbitrage opportunity?

Answer either “Canadian investors” or “U.S. investors”.

2. What changes in the 4 quoted prices above would likely occur to eliminate any further possibilities of covered interest arbitrage? ( answer with just ⬇ or ⬆ )

            Spot rate of Canadian dollar                                                

            90‑day forward rate of Canadian dollar       

            90‑day Canadian interest rate (a periodic rate)                    

            90‑day U.S. interest rate ( a periodic rate)               

Answer 1