a) Assume that you can buy 250 Canadian dollars with 100 British pounds and you have 100 British pounds. The following exchange rates are available. Country U.S. $ Equivalent Currency per U.S. $ Canada 1.3500 U.K 1.8305 i) Complete the table above by filling in the blanks? ii) Compute how much profit, if at all, you can earn with triangle arbitrage? b) Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925. The nominal risk-free rate in Canada is 3% while it is 4 percent in the U.S. At what Canadian interest rate, there will be no possibility for profitable arbitrage?

a) Assume that you can buy 250 Canadian dollars with 100 British pounds and you have 100 British pounds. The following exchange rates are available. Country U.S. $ Equivalent Currency per U.S. $ Canada 1.3500 U.K 1.8305 i) Complete the table above by filling in the blanks? ii) Compute how much profit, if at all, you can earn with triangle arbitrage? b) Assume the current spot rate is C$1.2103 and the one-year forward rate is C$1.1925. The nominal risk-free rate in Canada is 3% while it is 4 percent in the U.S. At what Canadian interest rate, there will be no possibility for profitable arbitrage?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 5ST

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