Assume the following information:

	Quoted Price
Spot rate of Canadian dollar	$0.80
90 day forward rate of Canadian dollar	$0.78
90 day Canadian interest rate	5%
90 day U.S. interest rate	2.2%

Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $2 million.) Round your answer to one decimal place.

%

What market forces would occur to eliminate any further possibilities of covered interest arbitrage?

1. The Canadian dollar's spot rate should fall, and its forward rate should fall; in addition, the Canadian interest rate may rise and the U.S. interest rate may rise.
2. The Canadian dollar's spot rate should rise, and its forward rate should fall; in addition, the Canadian interest rate may fall and the U.S. interest rate may rise.
3. The Canadian dollar's spot rate should fall, and its forward rate should rise; in addition, the Canadian interest rate may rise and the U.S. interest rate may fall.