KDV, Ltd., is a Canadian company. It can borrow or lend funds in Canada at an interest rate of 3.72%. KDV, Ltd., also has operations in Brazil where it can borrow or lend funds at an interest rate of 7.55%. The spot exchange rate between the Brazilian Real and the Canadian Dollar is 4.1792 Brazilian Reals per Canadian Dollar. The 360-day forward exchange rate is 4.2644 Brazilian Reals per Canadian Dollar. By borrowing 200,000.0000 of one currency, determine an arbitrage that will make KDV a profit.

Questions:

1. Which country (1=Canada, 2= Brazil) would KDV borrow this money to make this arbitrage profit?

2. When KDV converts this money to the other country?s currency, how much of this other country?s currency would KDV receive? 3. Units for #2's answer: (1 = Canadian $s, 2 Brazilian Reals)

4. Should KDV buy or sell a 360-day forward contract at time 0? (1 = buy, 2 = sell)

5. For how many Canadian $s should KDV?s forward contract be for?

6. KDV should then lend this money in this other country. In one year, how much will KDV receive from the loan they made? 7. Units for #6's answer: (1 = Canadian $s, 2 Brazilian Reals)

8. In one year, after KDV receives their loan plus interest, when KDV converts these proceeds to the original country?s currency, how much of the original country?s currency will KDV receive? 9. Units for #8's answer: (1 = Canadian $s, 2 Brazilian Reals)

10. In one year, how much will KDV have to pay for principal and interest on the funds they borrowed? 11. Units for #10's answer: (1 = Canadian $s, 2 Brazilian Reals)

12. Arbitrage Profit = ???? amount 13. Units for #12's answer: (1 = Canadian $s, 2 Brazilian Reals)