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Suppose the spot CAD/GBP exchange rate is 1.62, the 1-year continuously compounded rate in Canada is 5%. Suppose the 1-year futures exchange rate is 1.6671

Suppose the spot CAD/GBP exchange rate is 1.62, the 1-year continuously compounded rate in Canada is 5%. Suppose the 1-year futures exchange rate is 1.6671

(a) What is the interest rate prevailing in the UK? (2 marks)

(b) What is the 6-month futures exchange rate? (2 marks)

(c) Suppose the 6-month futures exchange rate is 1.63. Is there an arbitrage? If so, show how you can make a risk-free profit with a loan of 1 million. (3 marks)

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