You are a currency arbitrageur, use the following data to make a 180-day CIA recommendation (assume that the borrowing and investing rates are identical, that the bid-ask spread in the foreign exchange markets is zero and that there are no transactions costs). 10 marks

Data:

• Home: Canada;
• Available funds: CAD 5,000,000 or equivalent in EUR
• Spot: 1.48 CAD/EUR;
• Annual T-Bill rate: Canada 4%; Euro: 1%
• Forward 180-day: 1.52 CAD/EUR

1. Show how you can determine if there is a profitable arbitrage opportunity.
2. Calculate the forward premium or discount and use the arbitrage rules of thumb to decide your CIA strategy
3. Represent your CIA strategy in a diagram showing the currency exchanges, borrowing, and investing flows, and show all calculations. Clearly state the arbitrage profit (round your final answer to the dollar, no decimals).