HomeworkLib
Question

Assume the current spot rate is CAD1.3240 and the 1-year forward rate is CAD1.3215. The nominal risk-free rate in Canada is 2
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Using covered interest arbitrage,
Convert 1$ into CAD at spot rate and get 1*1.3240 = CAD 1.3240

Invest for one year and get 1.3240(1+2.25%) = CAD1.35379

Convert into USD at forward rate = 1.35379/1.3215 = $1.024434

If invested in US, amount = 1(1+2.1%) = $1.021

Extra profit = $0.003434

Hence, the answer is 0.0034

0 0
Add a comment
Know the answer?
Add Answer to:
Assume the current spot rate is CAD1.3240 and the 1-year forward rate is CAD1.3215. The nominal...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • The spot rate between Canada and the U.S. is Can$1.2398/$, while the one-year forward rate is...

    The spot rate between Canada and the U.S. is Can$1.2398/$, while the one-year forward rate is Can$1.2397/$. The risk-free rate in Canada is 4.31 percent and risk-free rate in the United States is 2.60 percent. How much in profit can you earn on $6,500 utilizing covered interest arbitrage?

  • The spot rate between the U.K. and the U.S. is £.7614/$, while the one-year forward rate...

    The spot rate between the U.K. and the U.S. is £.7614/$, while the one-year forward rate is £.7540/$. The risk-free rate in the U.K. is 4.59 percent and risk-free rate in the United States is 2.74 percent. How much in profit can you earn on $11,000 utilizing covered interest arbitrage? a.$316.41 b.$276.86 c.$103.15 d.$253.13 e.$91.68

  • The spot rate between the U.K. and the U.S. is £.7614/$, while the one-year forward rate...

    The spot rate between the U.K. and the U.S. is £.7614/$, while the one-year forward rate is 7540/$. The risk-free rate in the U.K. is 4.59 percent and risk-free rate in the United States is 274 percent. How much in profit can you earn on $11,000 utilizing covered interest arbitrage? Multiple Choice ο $9168 ο S25313 ο $10315 ο S276 86 ο S316 41

  • QUESTION 1: Suppose that the current spot exchange rate is GBP1= €1.50 and the one-year forward...

    QUESTION 1: Suppose that the current spot exchange rate is GBP1= €1.50 and the one-year forward exchange rate is GBP1=€1.60. One-year interest rate is 5.4% in euros and 5.2% in pounds. If you have EUR1,000,000, what is the Covered Interest arbitrage profit in EUR? QUESTION 2: Suppose that the current spot exchange rate is GBP1= €1.50 and the one-year forward exchange rate is GBP1=€1.60. One-year interest rate is 5.4% in euros and 5.2% in pounds. If you conduct covered interest...

  • The spot rate for the Japanese yen currently is ¥106 per $1. The one-year forward rate...

    The spot rate for the Japanese yen currently is ¥106 per $1. The one-year forward rate is ¥105 per $1. A risk-free asset in Japan is currently earning 5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security? 74. The spot rate for the Japanese yen currently is ¥106 per $1. The one-year forward rate is $105 per $1. A risk-free asset in Japan is currently earning 5 percent. If interest...

  • Assume the following information: Spot rate of Canadian dollar : $.80 90-day forward rate of Canadian...

    Assume the following information: Spot rate of Canadian dollar : $.80 90-day forward rate of Canadian dollar : $.79 90-day Canadian interest rate : 4% 90-day U.S. interest rate : 2.5% a) What would be the return to a U.S. investor who used covered interest arbitrage from investing in Canada? (assume the investor invests $1,000,000). Does the return exceed the return from investing in the U.S. over the 90-day period? Is it worthwhile for the U.S. investor to invest in...

  • Suppose that the current spot exchange rate is €0.8250/$ and the three month forward exchange rate...

    Suppose that the current spot exchange rate is €0.8250/$ and the three month forward exchange rate is €0.8132/$. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit

  • Suppose that the current spot exchange rate is €0.8250/$ and the three month forward exchange rate...

    Suppose that the current spot exchange rate is €0.8250/$ and the three month forward exchange rate is €0.8132/$. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit

  • suppose that the current spot exchange rate is €0.815/$ and the three month forward exchange rate...

    suppose that the current spot exchange rate is €0.815/$ and the three month forward exchange rate is €0.815/$. the three month interest rate is 6.00 percent per annum in the United States and 5.40 percent per annum in France . assume that you can borrow up to $1,000,000 or €30,000. show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S dollars. also determine the size of your arbitrage...

  • 1. Assume the following information: Spot rate of Canadian dollar : $.80 90-day forward rate of Canadian dollar : $.79 9...

    1. Assume the following information: Spot rate of Canadian dollar : $.80 90-day forward rate of Canadian dollar : $.79 90-day Canadian interest rate : 4% 90-day U.S. interest rate : 2.5% a) What would be the return to a U.S. investor who used covered interest arbitrage from investing in Canada? (assume the investor invests $1,000,000). Does the return exceed the return from investing in the U.S. over the 90-day period? Is it worthwhile for the U.S. investor to invest...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT