Covered Interest Arbitrage in Both Directions Assume that the existing U.S. one-year interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt to engage in covered interest arbitrage, what will be their return? If Canadian investors attempt to engage in covered interest arbitrage, what will be their return?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 7, Problem 11QA
Textbook Problem

Covered Interest Arbitrage in Both Directions Assume that the existing U.S. one-year interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt to engage in covered interest arbitrage, what will be their return? If Canadian investors attempt to engage in covered interest arbitrage, what will be their return?

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