Assume the following information:
Quoted Price
Spot rate of Canadian dollar $.977/C$
90-day forward rate of Canadian dollar $.925/C$
90-day Canadian interest rate (a periodic rate) 8%
90-day U.S. interest rate ( a periodic rate) 5%
1. Given this information, who has a covered interest arbitrage opportunity?
Answer either “Canadian investors” or “U.S. investors”.
2. What would be the home currency-denominated rate of return to an investor who successfully used covered interest arbitrage? (Assume the investor starts with 50,000 units of home currency)
3. What changes in the 4 quoted prices above would likely occur to eliminate any further possibilities of covered interest arbitrage?
Please explain it step by step.