international finance. carry trade concept. arbitrage etc

AVD30% 15:08 international finance - Saved ... (TOTAL - 15 MARKS] END OF QUESTION TWO BE630-6-SP-RESIT 4 QUESTION THREE (a) What is a carry trade? Are the profits from carry trade risk-free? (5 marks) (b) Let the spot rate between the UK and Canada be 4.9 CAD GBP, and the Canadian 6 month (annualised) interest rate is 4% and the 6 month (annualised) UK interest rate is 10%. What should the market quoted forward rate be to ensure there is no arbitrage opportunity? (5 marks) (c) If the actual forward rate was 5 CAD GBP, demonstrate how you make an arbitrage profit with 1 CAD. (5 marks) [TOTAL - 15 MARKS END OF QUESTON THREE END OF SECTION A