Covered interest arbitrage than if she invested in country

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Reference no: EM132014899

Assume the following information:

Spot rate of Canadian Dollar £0.4400

90 day forward rate of Canadian Dollar £0.4345

90 day Canadian interest rate -4%

90-day U.K interest rate - 2.5%

Required

a) Show the IRP does not hold.

b) Assume a U.K investor has £100,000. Determine the excess returns she would earn if she engaged in covered interest arbitrage than if she invested in her country.

Reference no: EM132014899

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