a) Assume the current spot rate is C$1.1875 and the one-year forward rate is C$1.1724. The nominal risk-free rate in Canada is 4 percent while it is 3 percent in the U.S. Using covered interest arbitrage you can earn an extra ………profit over that which you would earn if you invested $1 in the U.S.

b) You have 100 British pounds. A friend of yours is willing to exchange 180 Canadian dollars for your 100 British pounds. What will be your profit or loss if you accept your friend's offer, given the following exchange rate?

Country U.S $ Equivalent Currency per U.S. $

Canada ? 1.2103

U.K. 1.6100 ?

c) How well do you think relative purchasing power parity (PPP) and uncovered interest parity (UIP) behave? That is, do you think it's possible to forecast the expected future spot exchange rate accurately? What complications might you run into?

Answer rating: 100% (QA)

a To calculate the profit from covered interest arbitrage we need to compare the returns from investing 1 in Canada versus investing 1 in the US and t... View the full answer