0. Investing interest rates in Canada are 3.25% p.a. and in France they are currently at 1.25% p.a. The CAD/EUR spot rate is 0.7541 (a) Assume no transaction costs. Calculate the theoretical two-year forward rate of the CAD implied by Interest Rate Parity.

   (b) Now assume the actual two-year forward rate is CAD/EUR 0.7050. What, if any, is the percentage return from engaging in Covered Interest Arbitrage? Assume a transaction cost of 0.5% in the spot and the forward market. Also assume that borrowing rates are 0.8% higher than the investing rates in both countries.

   Your answer will be either (choose the appropriate one):

   1. Arbitrage: Calculate the result as a percentage of your initial borrowing, accurate to 4 decimal

      places, making sure to include any opportunity costs in your calculations).

   2. No arbitrage: If there is no arbitrage available then show how you are unable to make money

      through a covered interest arbitrage process.