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Assume that the nominal interest rate in Canada is 5% and the nominal interest rate in the US is also 5%. The current exchange rate is 1.25CAD/USD and the 1-year forward exchange rate is 1.30CAD/USD. Considering the above figures, you intend to make arbitrage profit by doing the following: (i) borrowing 1,000 CAD, (ii) converting CAD to USD, (iii) investing USD for 1 year, (iv) exchanging USD back for CAD in 1 year, and (v) returning the CAD loan principal and interest. What will be the outcome of you trade after going through the steps as described above?
Sagot :
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