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Floyd Khoza is a foreign exchange trader with HSBC . He notices the following quotes. Spot exchange rate CAD 1 . 2 0 5 1

Floyd Khoza is a foreign exchange trader with HSBC. He notices the following quotes.
Spot exchange rate CAD1.2051/US$
1 year forward exchange rate CAD1.1922/US$
1 year US$ interest rate 1.25% per year
1 year CAD interest rate 3.75% per year
2.1 Is the interest rate parity holding? You may ignore transaction costs. (2)
2.2 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.

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