How can you take advantage of the discrepancy

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Reference no: EM132059728

1. The current US $-Canadian dollar(C$) exchange rate is $0.75/C$. The yield on a one-year US Treasury security is 1%, and the yield on the one-year Canadian Treasury security is 1.5%. The one-year forward rate (F_s/c$) is $0.80/C$. Based on these quotes, does interest-rate parity hold? Show your work.

2. Based on your answer above, if interest rate parity does not hold, how can you take advantage of the discrepancy to make a risk-free profit? Assume that you will borrow/invest the equivalent of US$1, 000. (Be specific in your answer: state in which currency you will borrow and invest; the total cost of borrowing; the proceeds from your investment, and the net profits from your strategy.

Reference no: EM132059728

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