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The answer to covered interest arbitrage

HJ, an abitrager with Bank of Montreal, faces the following CAD/USD prices;
Spot: CAD 1.49/USD
6M Forward: CAD 1.51/USD
6M CAD interest rate 7.5% per annum
6M USD interest rate 5.0% p.a.

H.J is authorized to use CAD20,000,000 or its USD equivalent. The ending profit, if any, should be realized in CAD. How can he complete interest arbitrage? What will be his profit?

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M928738

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