The 6-month interest rate in the US is 12.25% p.a. The 6-month interest rate in Canada is 15.25% p.a. The spot exchange rate is USD0.8203/CAD and the 6-month forward exchange rate is USD0.8113/CAD. (1) Are interest rates and forward rate in equilibrium? (2) For a transaction size of US$700,000, how can an investor take advantage of the situation without taking undue risks? Ignore transaction costs and income taxes.

The 6-month interest rate in the US is 12.25% p.a. The 6-month interest rate in Canada is 15.25% p.a. The spot exchange rate is USD0.8203/CAD and the 6-month forward exchange rate is USD0.8113/CAD. (1) Are interest rates and forward rate in equilibrium? (2) For a transaction size of US$700,000, how can an investor take advantage of the situation without taking undue risks? Ignore transaction costs and income taxes.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

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