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Determine returns from trade

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1. Suppose the Canadian dollar-Euro spot rate is S0 = 1.38 CAD per euro. The one year dollar-Euro forward rate is F0,1 = 1.39 CAD per euro. The one year interest rate in the Canada is 2 percent; in Europe the one year interest rate is 1.8 percent.

a. Suppose an investor has 500,000 Canadian dollars to invest then converts it to euros at the spot rate, invests the resulting capital at the European interest rate for one year and converts the proceeds back to CAD at the forward rate. Determine returns from this trade.

b. Suppose the investor buys one year Canadian Treasury securities with the 500,000 instead. Determine whether this strategy or the one in (a) generates greater profit. Based on this calculation explain in a sentence whether this forward rate is the equilibrium rate.

Reference no: EM132607593

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