Floyd Khoza is a foreign exchange trader with HSBC$.$ He notices the following quotes.

Spot exchange rate CAD$1\mathrm{.}2051/$US$

$1$ year forward exchange rate CAD$1\mathrm{.}1922/$US$

$1$ year US$ interest rate $1\mathrm{.}25\%$ per year

$1$ year CAD interest rate $3\mathrm{.}75\%$ per year

$2\mathrm{.}1$ Is the interest rate parity holding? You may ignore transaction costs. $(2)$

$2\mathrm{.}2$ Is there an arbitrage opportunity? If yes, show what steps need to be taken to make

arbitrage profit. Assuming that Floyd Khoza is authorized to work with US$ $1,000,000,$

compute the arbitrage profit in dollarQuestion $2$

$[$Marks $12]$

Floyd Khoza is a foreign exchange trader with HSBC$.$ He notices the following quotes.

$2\mathrm{.}1$ Is the interest rate parity holding? You may ignore transaction costs.

$2\mathrm{.}2$ Is there an arbitrage opportunity? If yes, show what steps need to be taken to make

arbitrage profit. Assuming that Floyd Khoza is authorized to work with US$ $1,000,000,$

compute the arbitrage profit in dollars.