The Canadian Dollar (CAD) has shown higher volatility in recent days. The spot rate is $0.5/CAD1. Central Bank undertakes arbitrage transactions in CAD using a sum of $10 million. Annual interest rates are 9.9 per cent in Australia and 5.9 per cent in Canada. The bank can borrow or lend at these rates. Use interest rate parity theorem. 1) What is the expected net spread, if the forward rate is $0.54/CAD1? 2) At what forward rate will the arbitrage opportunity disappear?

The Canadian Dollar (CAD) has shown higher volatility in recent days. The spot rate is $0.5/CAD1. Central Bank undertakes arbitrage transactions in CAD using a sum of $10 million. Annual interest rates are 9.9 per cent in Australia and 5.9 per cent in Canada. The bank can borrow or lend at these rates. Use interest rate parity theorem. 1) What is the expected net spread, if the forward rate is $0.54/CAD1? 2) At what forward rate will the arbitrage opportunity disappear?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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