The following table contains information on spot and forward exchange rates among U.S. dollar (USD), Malaysian ringgit (MYR), Japanese yen (JPY) and Canadian dollar (CAD).

Currencies 3-month forward rate Spot rate

USD/MYR 4.3936 4.3610

USD/JPY 107.3333 107.6400

USD/CAD 1.3856 1.3839

The following table contains information on the 3-month nominal risk-free rate per annum for the four different currencies

3-month nominal risk-free rate

MYR USD CAD JPY

4.00% 1.00% 1.50% 0.00%

Note that the Japanese yen 3-month nominal risk-free rate is zero percent per annum.

(a)Compute the equilibrium or arbitrage-free 3-month forward exchange rates for the three currency pairs contained in the first table.

(b)Based on your results in part (b), state if an arbitrage opportunity exists for each of the three currency pairs. Briefly explain your answer.

(c)Compute arbitrage-free 1-year forward USD/CAD exchange rate.