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Suppose the 12 month forward price of the Euro in terms of the Canadian dollar (CAD) is 1.60 CAD/Euro and the spot price of the Euro in terms of the CAD is 1.50 CAD/Euro. Also suppose the interest rate on a one year Euro investment is 5%, while the interest rate on a one year Canadian investment is 10%. There are no transaction costs. Is there an arbitrage opportunity here? If you could borrow Euros or Canadian dollars at the above respective interest rates, explain exactly how you would take advantage of this situation to make a riskless profit.

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Financial Management, Finance

Category:- Financial Management
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