Question

In: Finance

The spot rate between Canada and the U.S. is Can$1.2449/$, while the one-

The spot rate between Canada and the U.S. is Can$1.2449/$, while the one-year forward rate is Can$1.2448/$. The risk-free rate in Canada is 4.65 percent and risk-free rate in the United States is 2.77 percent. How much in profit can you earn on $12,500 utilizing covered interest arbitrage?

Expert Solution

Borrow in USD, convert to Can$ at the spot rate, invest in Can$, reconvert to USD at the forwards rate and finally repay the USD loan.

Amount in Can$ = Amount in USD*Exchange rate of Can$ per USD

= 12500*1.2449

= Can$15,561.25

Maturity value of investment in Canada = Investment*(1+ Interest ratain Can$)

=15561.25*(1+0.0465)

= Can$16,284.85

Amount in US$ on reconversion = Maturity value in Can$/Forward rate

=16284.85/1.2448

= $13,082.30

Repayment in US $ at 2.77% interest rate after 1 year = 12500*1.0277

= $12,846.25

Profit = Amount in USD after reconversion- Repayment of USD loan

=13082.30-12846.25

= $236.05

Profit = $236.05

Junaid answered 2 years ago

The spot rate between Canada and the U.S. is Can$1.2416/$, while the one-year forward rate is...

The spot rate between Canada and the U.S. is Can$1.2416/$, while the one-year forward rate is Can$1.2415/$. The risk-free rate in Canada is 4.43 percent and risk-free rate in the United States is 2.66 percent. How much in profit can you earn on $7,000 utilizing covered interest arbitrage?

The spot rate between the U.K. and the U.S. is £.7554/$, while the one-year forward rate...

The spot rate between the U.K. and the U.S. is £.7554/$, while the one-year forward rate is £.7528/$. The risk-free rate in the U.K. is 4.35 percent and risk-free rate in the United States is 2.62 percent. How much in profit can you earn on $5,000 utilizing covered interest arbitrage?

The spot rate between the U.K. and the U.S. is £.7604/$, while the one-year forward rate...

The spot rate between the U.K. and the U.S. is £.7604/$, while the one-year forward rate is £.7538/$. The risk-free rate in the U.K. is 4.55 percent and risk-free rate in the United States is 2.72 percent. How much in profit can you earn on $10,000 utilizing covered interest arbitrage?

Suppose the following conditions exist between the U.S. and Canada. U.S. interest rate = 4.5%. Canadian...

Suppose the following conditions exist between the U.S. and Canada. U.S. interest rate = 4.5%. Canadian interest rate = 3.4%. Spot rate: 1 CAD = .9537 USD. 6 month forward rate: 1 CAD = .9612 USD. Are the conditions of interest rate parity violated? If so, what would be our profit if we engaged in covered interest arbitrage with $2M? A. Interest rate parity is not violated- no opportunity B. Yes, interest rate parity is violated. We can make a...

Suppose the following conditions exist between the U.S. and Canada. U.S. interest rate = 3.22%. Canadian...

Suppose the following conditions exist between the U.S. and Canada. U.S. interest rate = 3.22%. Canadian interest rate = 3.1%. Spot rate: 1 CAD = .9601 USD. 6 month forward rate: 1 CAD = .9622 USD. Are the conditions of interest rate parity violated? If so, what would be our profit if we engaged in covered interest arbitrage with $10M?

Purchasing Power Parity If the current spot rate between the U.S. dollar and the Swedish krona...

Purchasing Power Parity If the current spot rate between the U.S. dollar and the Swedish krona was $1 = 7.6123 krona, and if the inflation rate in the United States was 5.7 percent and in Sweden it was 2.7 percent, then what would be the expected spot rate in one year? (Round your answer to 4 decimal places.) Purchasing Power Parity If the current spot rate between the U.S. dollar and the Swedish krona was $1 = 7.6423 krona, and...

Q6) In early 2012, the spot exchange rate between the Swiss Franc and U.S. dollar was...

Q6) In early 2012, the spot exchange rate between the Swiss Franc and U.S. dollar was 1.0404 ($ per franc). Interest rates in the U.S. and Switzerland were 0.25% and 0% per annum, respectively, with continuous compounding. The three-month forward exchange rate was 1.0300 ($ per franc). What arbitrage strategy was possible?

Assume that the spot exchange rate between U.S. Dollar and Chinese Yuan is $1 = 6.90...

Assume that the spot exchange rate between U.S. Dollar and Chinese Yuan is $1 = 6.90 yuans Compute the direct exchange rate between U.S. $ and Chinese yuan (i.e., value of 1 yuan in $). b)At this exchange rate, how much would a HP laptop which costs $725 in Houston cost in Beijing? (Ignore the costs of shipping and handling and any tariff) c,Assume that on pressure from the Trump administration, China agrees to let yuan appreciate by 15%. What...

In early 2012, the spot exchange rate between the Swiss Franc and U.S. dollar was 1.0404...

In early 2012, the spot exchange rate between the Swiss Franc and U.S. dollar was 1.0404 ($ per franc). Interest rates in the U.S. and Switzerland were 0.25% and 0% per annum, respectively, with continuous compounding. The three-month forward exchange rate was1.0300 ($ per franc). What arbitrage strategy was possible? How does your answer change if the exchange rate is 1.0500 ($ per franc).

As at 1st January, 2017, the spot exchange rate between the U.S. dollar and Japanese Yen...

As at 1st January, 2017, the spot exchange rate between the U.S. dollar and Japanese Yen was trading at $1.00 equivalent to ¥100. The local bank offered the Company to exchange $1.00 for ¥102 on 31st December, 2017. The Interest rates on one year government bonds were 6% in U.S. and 10% in Japan. The company can borrow and lend at the risk-free rate on government bonds. As an Investment Advisor you have been approached for advice by the CEO...