1) Current spot rate of CAD = $0.800. Interest rate in the U.S. = 7.0%. Interest rate in the Canada = 5.00% If the current 1-year forward rate for CAD is $0.820 and you wanted to set up a covered interest rate arbitrage, you should borrow in _______ and invest in ________

a) US Dollars; Canadian Dollars

b) Canadian Dollars; US Dollars

2) Suppose you have a credit line of $10,000,000 in the US and CAD 12,500,000 in Canada, and that you can borrow and lend at the prevailing rates of interest in these two countries. Current spot rate of CAD = $0.800. Interest rate in the U.S. = 7.0%. Interest rate in the Canada = 5.00%. If the 1-year current forward rate for CAD is $0.825, your covered interest arbitrage profit will be

a) $518,182

b) $124,242

c) $341,775

d) $128,125