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Reference no: EM1310382

Q. You are a foreign exchange trader specialized in the US dollar (USD) also Canadian
dollar (CAD) marketplace (CAD/USD). 1 morning, you find the following two CAD/USD
quotes: Quote A: 1.03-1.035 also Quote B: 1.038 - 1.042
Quotes are read as: (bid price (buy price) - ask price (sell price)

(i) Can you make m1y from these quotes, Explain how also Elucidate why? Illustrate what will happen to the forex marketplace rate CAD/USD if you continue trading with your strategy?

(ii) Another morning, you notice that the 1-year US dollar interest rate is 4%, while the 1-year interest rate on CAD deposits is 2.7%. Today's CAD/USD rate is $1.7. Illustrate what spot rate do you expect for the CAD/USD in 1 year?

(iii) You log onto your electronic brokerage account also find that the current quote for
the 360-day forward rate on CAD/USD is 1.0459. Is there an arbitrage opportunity? If so, describe Explain how you would take profit from it also Explain how much you would get if you invested $1. Illustrate what do you anticipate if all of your fellow traders start doing the same?

Reference no: EM1310382

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