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Suppose today’s exchange rate is $USD 0.90/CAD. The annualized six-month interest rates on US dollars and Canadian dollars are 2% and 5% respectively. The six-month forward rate is $USD 0.89/CAD. A foreign exchange advisory service has predicted that the CAD will appreciate to $USD 0.93/CAD within six months.
Does uncovered interest rate parity hold? What is the arbitrage profit per $100,000 USD?
A) No; arbitrage profit=$1833
B) NO, profit 6500
C) No, profit 4917
D) Yes, Profit 6500
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