Question: 1)(6 pts) Covered Interest Arbitrage. Assume the following information: Quoted Price Spot rate of Canadian dollar $.90 90day forward rate of Canadian dollar$.88 90day Canadian

1)(6 pts) Covered Interest Arbitrage. Assume the following information:

Quoted Price

Spot rate of Canadian dollar $.90

90day forward rate of Canadian dollar$.88

90day Canadian interest rate4.4%

90day U.S. interest rate1.6%

Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?

2)(5 pts) Covered Interest Arbitrage in Both Directions. The oneyear interest rate in New Zealand is 4 percent. The oneyear U.S. interest rate is 5.5 percent. The spot rate of the New Zealand dollar (NZ$) is $.60. The forward rate of the New Zealand dollar is $.615. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible.

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