Covered Interest Arbitrage Assume the following information:

Spot rate of Canadian dollar = $.81

90-day forward rate of Canadian dollar = $.80

90-day Canadian interest rate = 4%

90-day U.S. interest rate = 2.5%

Given this information, what would be the yield (per- centage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $2 million.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?

Interest Rate Parity Consider investors who invest in either U.S. or British 1-year Treasury bills. Assume zero transaction costs and no taxes.a. If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills. Is this statement true or false? If false, correct the statement.

b. If interest rate parity exists, then the return for British investors who use covered interest arbitrage will be the same as the return for British investors who invest in British Treasury bills. Is this statement true or false? If false, correct the statement.