Define uncovered interest rate parity (UIP). Derive the equations of UIP in both levels and logs. (b)
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Question:
Define uncovered interest rate parity (UIP). Derive the equations of UIP in both levels and logs.
(b) Let the spot rate between the UK and Canada be 3.5 CAD/GBP, and the Canadian 6 month (annualized) interest rate is 6% and the 6 month (annualized) UK interest rate is 8%.
(i) What should the market quoted forward rate be to ensure there is no arbitrage opportunity? (5 Marks)
(ii) If the actual forward rate was 4.5 CAD/GBP, demonstrate how you make an arbitrage profit with 1 CAD.
Related Book For
Economics For Investment Decision Makers
ISBN: 9781118111963
1st Edition
Authors: Sandeep Singh, Christopher D Piros, Jerald E Pinto
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