Question: Can someone help me to solve this step by step Problem 3 (16 points) You work as a trader for the arbitrage desk at RawTrade,

Can someone help me to solve this step by step

Can someone help me to solve this step by step Problem 3

Problem 3 (16 points) You work as a trader for the arbitrage desk at RawTrade, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between USS and Canadian dollar is S1.1100/CS, while forward price of Canadian dollar for the contract maturing in 6 months is S1 04000S. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based on continuous compounding. (a) What is the no-arbitrage futures exchange rate? (4 pts) (b) Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 100 units of a currency. (12 pts)

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