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In early 2012, the spot exchange rate between Canadian dollar and U.S. dollar was 0.8200 (USD per CAD). Interest rates in the U.S. and Canada were 1.25% and 1.75% per annum, respectively, with continuous compounding. The six-month forward exchange rate was 0.8300 (USD per CAD). What arbitrage strategy was possible? How does your answer change if the forward exchange rate is 0.7900 (USD per CAD).

In early 2012, the spot exchange rate between Canadian dollar and U.S. dollar was 0.8200 (USD per CAD). Interest rates in the U.S. and Canada were 1.25% and 1.75% per annum, respectively, with continuous compounding. The six-month forward exchange rate was 0.8300 (USD per CAD). What arbitrage strategy was possible? How does your answer change if the forward exchange rate is 0.7900 (USD per CAD).

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter27: Multinational Financial Management
Section: Chapter Questions
Problem 1P
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In early 2012, the spot exchange rate between Canadian dollar and U.S. dollar was 0.8200 (USD per CAD). Interest rates in the U.S. and Canada were 1.25% and 1.75% per annum, respectively, with continuous compounding. The six-month forward exchange rate was 0.8300 (USD per CAD). What arbitrage strategy was possible? How does your answer change if the forward exchange rate is 0.7900 (USD per CAD).
Transcribed Image Text:In early 2012, the spot exchange rate between Canadian dollar and U.S. dollar was 0.8200 (USD per CAD). Interest rates in the U.S. and Canada were 1.25% and 1.75% per annum, respectively, with continuous compounding. The six-month forward exchange rate was 0.8300 (USD per CAD). What arbitrage strategy was possible? How does your answer change if the forward exchange rate is 0.7900 (USD per CAD).
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