Suppose you are working for a Canadian investment firm, and you observe that the (annual) yield differential between Canadian assets and British assets is 0.28 percentage points, and the British assets are more attractive than the Canadian assets.

a)Suppose you call the bank for exchange rate quotes, and the quotations for the C$/ in the spot market and the forward market are 1.7500 and 1.7535 respectively.Is there any arbitrage opportunity?If yes, what would you do?If no, why?Explain.(6 points)

Note:Assume your firm does not have any funds denominated in C$ and .

b)Suppose your firm has the ability to change the spot exchange rate, the forward exchange rate, and the corporate bond yields in both countries, what happens to these four variables after the transactions you carried in part (a)?Explain in words.(8 points)

c)Suppose the pandemic hits Britain harder than Canada; therefore, the market anticipates it might take longer time for Britain to recover from the pandemic.

What happens to the demand for British assets?Explain.(3 points)

Suppose the change in the demand for British assets causes the interest rate differential between Canadian assets and British assets to change by 0.08 percentage points.Which assets would you like to hold?Explain. (3 points)

Hint:You need to decide whether the interest rate differential will increase or decrease and be sure to explain why the interest rate differential increases or decreases.