A large commercial bank observes the annual return on 180-day Canadian dollar denominated bonds (RC$) is 1.58% and the annual return on 180-day euro denominated bonds (R) is 2.76%. Suppose the spot /C$ exchange rate is 0.74, and is traded at a forward discount of 0.8% per year.

Note: Keep your answers to 4 decimal points if necessary.

1- Based on the above information, is there any arbitrage opportunity? If yes, what should the commercial bank do to capture this arbitrage opportunity? Explain. (8 points) 2- Suppose the commercial bank has the ability to move the market (i.e. affecting the spot exchange rate, the forward exchange rate, and the returns on bonds in both countries), what happens to these variables after the transactions carried in part (a)? Explain. (12 points) 3- Instead of affecting the interest rates and the 180-day forward exchange rate, suppose the spot exchange rate bears all the burden of adjustments, find the spot /C$ exchange rate that would eliminate interest arbitrage. (5 points)