• Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible. Assume the following information:

Quoted Price

Spot rate of Canadian dollar $.75

90 day forward rate of Canadian dollar $.73

90 day Canadian interest rate 4%

90 day U.S. interest rate 2.5%

Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage (Assume that he can borrow 12,000 USD or 16,000 CAD)? What market forces would occur to eliminate any further possibilities of covered interest arbitrage?