question archive Assume the following information: Quoted Price Spot rate of Canadian dollar $0
Assume the following information: Quoted Price Spot rate of Canadian dollar $0
Subject:BusinessPrice: Bought3
Assume the following information:
Quoted Price
Spot rate of Canadian dollar $0.81
90?day forward rate of Canadian dollar $0.79
90?day Canadian interest rate 4% (per 90 days)
90?day U.S. interest rate 2.5% (per 90 days)
a. Using approximate equation to find forward premium, what is the theoretical forward rate? 5 decimal places required.
b. Plotting the interest rate differential and p on the graph with IRP, should the point be ABOVE or BELOW the IRP line?
c. Based on (b), will it be beneficial for US investor to invest in foreign currency? No explanation required.
d. what would be the percentage return to a U.S. investor who did covered interest arbitrage? That is the return for investing in foreign currency. (Assume the investor invests $1,000,000.) Note: this needs not be a good strategy. In other words, this strategy can be wrong.
e. The forward rate should rise if a correct covered interest arbitrage is carried out, True or False? No explanation required.
