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Do unexploited covered arbitrage profit opportunities

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Question - Given the following prices in the international money markets: Spot rate= C$1.46/€

Forward rate (one year) = C$1.49/€

Interest rate (€) = 7% per year

Interest rate (C$) = 9% per year

Assuming no transaction costs or taxes exist, show how covered arbitrage profits could be made. Describe in detail the steps you would take to make a covered interest arbitrage profit with 1,000,000 units of currency of your choice. Assume you can borrow or lend at the above interest rates.

Suppose now that transaction costs in the foreign exchange market equal 0.25% per transaction. Do unexploited covered arbitrage profit opportunities still exist? Explain why or why not.

Reference no: EM132916991

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