How much arbitrage profit can you make

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Reference no: EM132198505

Question - You, as U.S investor, find the current annual interest rate in the U.S is 3% and the annual interest rate in Canada is 5%. The spot exchange rate for Canadian dollar is 0.95USD/CAD, the 90-day Canadian dollar forward exchange rate is 0.948 USD/CAD.

A) Based on covered interest rate parity theory, what is the implied 90-day forward rate of the Canadian dollar? is there any arbitrage opportunity to trade the forward contract on Canadian dollar?

B) Explain your arbitrage strategy using the forward contract and the investment in the money market.

C) How much arbitrage profit can you make if you can borrow up to $1 million us dollars? (Assume there is no transaction cost in the money market, so the borrowing interest rate equals the lending interest rate)

D) At the end of the 90 days, the Canadian dollar exchange turns out to be $0.92. Does it impact your covered interest rate arbitrage profit in (C)? Why?

Reference no: EM132198505

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