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You, as a U.S. investor, find the current annual interest rate in the U.S. is 3% and the annual interest rate in Canada is 5%.
You, as a U.S. investor, find the current annual interest rate in the U.S. is 3% and the annual interest rate in Canada is 5%. The spot exchange rate for Canadian dollar is $0.95 per Canadian dollar, the 90-day Canadian dollar forward exchange rate is $0.928 per Canadian dollar. Explain your arbitrage strategy using the forward contract and the investment in the money market? How much arbitrage profit can you make if you can borrow up to $1 million Canadian dollars or equivalent value of USD? (Assume there is no transaction cost in the money market, so the borrowing interest rate equals the lending interest rate.)
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