The 180-day interest rate in the United States is 12.25% per annum. The 180-day interestrate in Canada is 15.25% per annum. The Canadian dollar sells spot in New York forU.S. $.8203/Can$. The Canadian dollar sells 180 days forward in New York for U.S.$.8113.a. Are interest rates and forward rates in equilibrium?b. For a transaction size of U.S. $600,000, how can an investor take advantage of thesituation without taking undue risks? Ignore transaction costs and income taxes.
The 180-day interest rate in the United States is 12.25% per annum. The 180-day interest
rate in Canada is 15.25% per annum. The Canadian dollar sells spot in New York for
U.S. $.8203/Can$. The Canadian dollar sells 180 days forward in New York for U.S.
$.8113.
a. Are interest rates and forward rates in equilibrium?
b. For a transaction size of U.S. $600,000, how can an investor take advantage of the
situation without taking undue risks? Ignore transaction costs and income taxes.
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Given,
The 180-day interest rate in the United States is 12.25% per annum.
The 180-day interest rate in Canada is 15.25% per annum.
The Canadian dollar sells spot in New York for U.S. $.8203/Can$.
The Canadian dollar sells 180 days forward in New York for U.S. $.8113.
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