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An American exporter expects to receive 5 million Canadian Dollars in 6 months. Current prices are given as: Spot rate, St Forward rate, Ft,T Bid

An American exporter expects to receive 5 million Canadian Dollars in 6 months.

Current prices are given as:

Spot rate, St Forward rate, Ft,T

Bid - ask Bid - ask

CAD/USD 1.3115-1.3120 1.3105-1.3115

6 month interest rates (annualized)

USD CAD

Bid - ask Bid - ask

0.4 - 0.6% 0.3 - 0.5%

(a) If the exporting firm sells the CAD with a forward contract, how many USD will they get in 6 months?

(b) If they replicate the forward contract in the spot and money markets, how many USD will they get in 6 months? (c) What can explain the difference between (a) and (b)?

(d) Are there any arbitrage opportunities at these prices?

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