2) Suppose that Bank X allows you to lend or borrow in dollars with a bid/ask of 2.48%/2.53%. Bank Y allows you to lend or borrow in Chinese Yuan (CNY) with a bid/ask of 3.72%/3.84%. Both of these rates are for a 3-year term. The current Spot exchange rate is 6.8CNY/$. The 3-year futures rate is 7.4CNY/$.

a. Suppose you were to execute a carry trade strategy. What would be the interest rate spread you could achieve?

b. What is the annualized forward premium of the dollar?

c. If covered interest rate parity held, what should be the 3-year futures rate for CNY?

d. The mismatch between (a) and (b), or the difference between (c) and the actual futures price, demonstrate that there is an arbitrage opportunity available. What are the trades that would be required?