In exchange rate risk management, you need to understand and use the forward exchange rate market.

Consider the following data:

GBP = Great Britain Pound = Great Britains currency

CAD = CAnadian Dollar = Canadas currency

GBP / CAD spot rate: 1 GBP = 1.5 CAD

GBP / CAD forward rate: 1 GBP = 1.3 CAD

One-year Canadian commercial paper rate = 4%

One-year Great Britain commercial paper rate = 5%

a) Implement an arbitrage of this situation. Clearly show your calculations and results. In addition, explain what you would need to do to produce a 2 million CAD arbitrage profit.

You are now asked to analyze a new situation, with the following data:

CAD/USD spot rate: 1 CAD = 0.96 USD

CAD/Euro spot rate: 1 CAD = 0.7 Euro

Euro/USD spot rate: 1 Euro = 1.2 USD

1-year Euro/USD forward rate: 1 Euro = 1.3 USD

1-year U.S. money market rate = 4%

1-year European money market rate = 5%

b) Implement a triangular arbitrage. Explain what you need to do to generate a 1 million USD arbitrage profit. Clearly show your calculations