Business, 26.02.2020 21:00 00manray

Suppose the quarterly (90-day) interest rate in the US is 2.5% and it is 4% in Canada. If the $/CD spot exchange rate is $0.80/CD and the 90-day forward exchange rate between US and Canadian dollars is $0.79/CD , does the interest rate parity (IRP) hold? Why or why not? If it does not hold, what is the direction of the capital flow? If an arbitrageur can borrow up to $1,000,000 (or CD1,250,000), formulate a covered interest arbitrage. Make sure to explain your steps in detail (just writing out three random calculations does not count). Determine the amount of arbitrage profit. For interest rate parity (IRP) to hold, what should the correct forward exchange rate be?

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Suppose the quarterly (90-day) interest rate in the US is 2.5% and it is 4% in Canada. If the $/CD s...

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