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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Transcribed Image Text: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?
O a. 1) 5.81%; 2) $0.78/1CAD
O b. None of the options is correct
O c. 1) 2.68%; 2) $0.36/1CAD
O d. 1) 4.47%; 2) $0.52/1CAD
O e. 1) 3.80%; 2) $0.62/1CAD
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