1. If the price levels (indices) in Canada and the U.S. are 120 and 110 respectively, what is the PPP rate for Canadian dollar? If prevailing spot rate is $0.8334/C$, what is the real exchange rate of Canadian dollar? Which currency is overvalued/undervalued in PPP terms?

2. You see the following quotes: S_t = C$1.2125/$, F_t+6 = C$1.2100/$, i_C$ = 4%, and i_$ = 3%.

(a) Do these rates offer covered interest arbitrage opportunity?

(b) If yes, which way the arbitrage capital move? Calculate the arbitrage profit.