0. Investing interest rates in Canada are 3.25% p.a. and in France they are currently at 1.25% p.a. The CAD/EUR spot rate is 0.7541

1. (a) Assume no transaction costs. Calculate the theoretical two-year forward rate of the CAD implied by Interest Rate Parity.

   (b) Now assume the actual two-year forward rate is CAD/EUR 0.7050. What, if any, is the percentage return from engaging in Covered Interest Arbitrage? Assume a transaction cost of 0.5% in the spot and the forward market. Also assume that borrowing rates are 0.8% higher than the investing rates in both countries.

   Your answer will be either (choose the appropriate one):

   1. Arbitrage: Calculate the result as a percentage of your initial borrowing, accurate to 4 decimal places, making sure to include any opportunity costs in your calculations).

   2. No arbitrage: If there is no arbitrage available then show how you are unable to make money through a covered interest arbitrage process.

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Choose the correct answer with a short explanation. 6. Amaranda and Bartolo consume only two goods, x and y. They can trade only with each other and there is no production. The total endowment of good x equals the total endowment of good y. Amaranda's utility function is uA (XA,YA) = min{XA, YA} and Bartolo's utility function is UB (XB, YB) = max{XB, YB}. In an Edgeworth box for Ama- randa and Bartolo, the set of Pareto efficient allocations is a. the main diagonal. b. the edges of the box and the main diagonal. c. the whole Edgeworth box. d. the left and bottom edges of the box. e. the empty set. Choose the correct answer with a short explanation. 6. Amaranda and Bartolo consume only two goods, x and y. They can trade only with each other and there is no production. The total endowment of good x equals the total endowment of good y. Amaranda's utility function is uA (XA,YA) = min{XA, YA} and Bartolo's utility function is UB (XB, YB) = max{XB, YB}. In an Edgeworth box for Ama- randa and Bartolo, the set of Pareto efficient allocations is a. the main diagonal. b. the edges of the box and the main diagonal. c. the whole Edgeworth box. d. the left and bottom edges of the box. e. the empty set.

Answer rating: 100% (QA)

Step1 aInterest rate in Canada IC 325 Interest rate in France IF 125 Currency spot rat... View the full answer