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Assume that you have the following information: Spot Rate: 1.56 CAD/1 EUR Six-month Forward Exchange Rate: 1.61 CAD/1 EUR One-Year CAD Interest Rate: 0.30 %
Assume that you have the following information:
Spot Rate:
1.56 CAD/1 EUR
Six-month Forward Exchange Rate:
1.61 CAD/1 EUR
One-Year CAD Interest Rate:
0.30 % annually
One-Year EUR Interest Rate:
-0.42 % annually
CAD: Canadian Dollar
EUR: Euro
Is covered interest arbitrage worthwhile? If so, calculate the profits after six-months, assuming that you have 3,500 CAD. What else might you do to maximize profits if the covered interest arbitrage is worthwhile (explain in words)?
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