Q$4(30\%)$

You operate a Canadian firm, and your firm will need to pay $80,000$ to a European supplier in $180$ days.

You would like to hedge against changes in $C\frac{\text{\$}}{}Fx$ rate. You observe the following market quotes.

Note: To obtain the effective $180-$day interest rates, you can simply divide the quoted $($per annum$)$ interest

rates by two. For example, the effective $180-$day financing rate in $$ is $3\mathrm{.}35\%(=6\mathrm{.}7\frac{\%}{2}).$

Spot and Forward FX Contracts

$180-$day Interest Rates in $C$$ and $$

In answering this question, you might find it easier to first calculate the cross rates between $C$$ and $.$

$($a$)$ Based on the above quotations, is there any arbitrage profit opportunity from violating IRP? Show

your calculations and explain the results.

$($b$)$ What is the hedged $C$$ payable in $180$ days using a forward market hedge? Give your answer to the

nearest $C$$$.$

$($c$)$ Outline the borrowing, lending, and spot FX exchange strategies in order to accomplish a money

market hedge. What is the hedged C $ payable in $180$ days using the money market hedge? Give your

answer to the nearest $C$$$.$