It’s August, the EUR-CAD spot exchange rate is 1.29 Canadian dollars per Euro. A Canadian trader notes the risk-free interest rate at home is 3% p.a. continuously compounded for all maturities, and the Euro risk-free rate is 1.5% p.a. continuously compounded for all maturities. The 4-month forward contract on Euro with physical delivery is selling for 1.275 Canadian dollars. Are there arbitrage opportunities to be exploited? If so, lay out the opportunity in full with detailed explanations and exact cash flows at each step. 

Answer rating: 100% (QA)

Yes there are arbitrage opportunities to be exploited 1 The trader buys Euros at the spot exchange r... View the full answer