Interest rates in the United States are 1% and in Canada they are currently at 2%. The
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Question:
Interest rates in the United States are 1% and in Canada they are currently at 2%. The USD/CAD spot rate is 0.9881. You are offered a 12-month forward rate of 1.01.
• Calculate the theoretical forward rate implied by Interest Rate Parity.
• Is the forward contract relatively under-valued or overvalued?
• What is the percentage return from engaging in Covered Interest Arbitrage? (Calculate as a percentage of your initial borrowing, accurate to 4 decimal places)
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1305637108
6th edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
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