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Consider a Canadian who has C$1 million and is deciding to place her entire funds in either the Canadian 6-month Treasury Bills (TBs) or in

Consider a Canadian who has C$1 million and is deciding to place her entire funds in either the Canadian 6-month Treasury Bills (TBs) or in the Japanese 6-month TBs. The yield on the Canadian TBs is 0.7% and the yield on the Japanese TBs is 0.2%. The (six-month) forward C$-Yen exchange rate is 0.015 (C$ per Yen) and todays spot rate between the two currencies is 0.012 (C$ per Yen). Using this information answer the following questions.

  1. What is the forward spread? Is the Canadian dollar at forward premium or discount? And by how much (%)?

(b) What is the (hedged = risk-free) rate of return on the Japanese bonds?

(c) Based on your answer above, is there an arbitrage opportunity between the two deposits? Explain why or why not. (YOU SHOULD EMPLOY MATHEMATICAL RELATIONSHIPS (FORMULAS) IN ANSWERING ALL PARTS OF THIS QUESTION.

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