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A) (i) If the spot rate between the UK and Canada be 3.5 CAD/GBP, and the Canadian 6-month (annualised) interest rate is 6% and the

A) (i) If the spot rate between the UK and Canada be 3.5 CAD/GBP, and the Canadian 6-month (annualised) interest rate is 6% and the 6 month (annualised) UK interest rate is 8%. What should the market quoted forward rate be to ensure there is no arbitrage opportunity?

(ii) If the actual forward rate was 4.5 CAD/GBP, demonstrate how you make an arbitrage profit with 1 CAD.

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