n a particular year, the spot exchange rate between the Canadian dollar and U.S. dollar was $0.7554 (per Canadian collar). Interest rates in the U.S. and Canada were 1.5 percent and 1.25 percent per annum, respectively, with continuous compounding. The three-month forward exchange rate was $0.7675, which creates an arbitrage opportunity. Propose one possible strategy to take advantage of this situation and show your possible profit.

n a particular year, the spot exchange rate between the Canadian dollar and U.S. dollar was $0.7554 (per Canadian collar). Interest rates in the U.S. and Canada were 1.5 percent and 1.25 percent per annum, respectively, with continuous compounding. The three-month forward exchange rate was $0.7675, which creates an arbitrage opportunity. Propose one possible strategy to take advantage of this situation and show your possible profit.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterP2: Part 2: Exchange Rate Behavior

Section: Chapter Questions

Problem 1Q

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