Interest rates are 6.5% in the U.S. and 4% in Canada. Jacque carry trader borrows C$10,000,000 to execute a carry trade. At the start, the exchange rate is C$1.1325/$. After one year, the exchange rate is C$1.1175/$.
a) What is Jacque’s C$ profit or loss over the year?
b) When Jacque starts this trade, she is hoping that the U.S. dollar doesn’t ______________.
c) When Jacque starts this trade, she is hoping that the C$ doesn’t
d) If the C$ had not appreciated or depreciated over the year (stayed at C$1.1325/$) verify that Jacque would have made C$250,000. What’s special about C$250,000? You’ll see if you take the interest rate differential and multiply that percentage profit by the amount of Canadian dollars Jacque borrowed.
e) What is the BEEX in one year?