. The one year interest rate in Canada is 5.8 percent. The one year U.S. interest rate is 8.0 percent. The spot rate of the Canadian dollar (CAD $) is $1.50. The forward exchange rate of the Canadian dollar is $1.52.

Required:

i. Explain why covered interest arbitrage is or is not feasible in each case. Show necessary calculations.

a.for U.S. investors

b.for Canadian investors

ii. What market forces would occur to eliminate any further possibilities of covered interest arbitrage?