Let's assume today's exchange rate is $0.90/CAD. Annualized semiannual interest rates for the US dollar and Canadian dollar are 2% and 5%, respectively. The six-month forward rate is 0.89 USD/CAD. A foreign exchange advisory service predicted that the CAD would rise to $0.93/CAD within six months.

Does uncompensated interest rate parity hold? What is the arbitrage profit per 100,000 USD?

Answer rating: 100% (QA)

Uncompensated interest rate parity UIP states that the difference in the interest rates of two count... View the full answer