Rose is a foreign exchange trader for a bank in San Francisco. she observes the following rates:
spot exchange rate: CAD 1.3453/$
3- month forward rate: 120 points
3 month $ interest rate: 2% per annum
3 month CAD interest rate: 3.2% per annum
a) can you help Ms Rose identify whether there is an arbitrage opportunity or not?
b) can you help Ms. Rose form a covered interest arbitrage strategy to generate profit? please describe each step of the covered interest arbitrage and show the arbitrage profit. if she has to borrow any currency please borrow 5,000,000
c) what assumptions do we make for the covered interest arbitrage to work?
d) please draw a graph to show the current interest rate difference( horizontal axis) and the forward premium or discount (vertical axis) and then discuss the movement from the current point to an equilibrium point. make sure that you indicate which actions in part b contribute to the movement