Answered

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Given the information:

Interest rate in US (Rh): 7%
Interest rate in Canada (Rh): 5%
Line of credit in US USD 10,000,000
Line of credit in Canada CAD 12,500,000
The spot rate for CAD (S0): $0.80
1-year forward rate for CAD (FR): $0.812


Which of the following should result from covered interest arbitrage?
Group of answer choices

Downward pressure on the Canadian interest rate.

Downward pressure on the CAD’s spot rate.

Downward pressure on the CAD’s forward rate.

Upward pressure on the U.S. interest rate.

Sagot :

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Answer:

Downward pressure on the CAD’s forward rate: If many investors engage in covered interest arbitrage, the demand for CAD forward contracts would increase, leading to a decrease in the forward rate for CAD.

Explanation:

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