Question

国际金融计算题 (英文)

you are an American compay and you can choose to borrow USD or CAD (Canadian dollars). The current interest rate in the US IS 3% and the current interest rate in Canada is 4% .
The current spot rate is 0.9 USD=1CAD
the 1 year forward rate is 0.8USD =1CAD
can we make an arbitrage profit ?Show mathematically how we can make an arbitrage profit
(either by borrowing in America and lending in Canada or borrowing in Canada and lending in America )

Answer 1

If borrows 1CAD in Canada and saves in US, the company will gain 1CAD*(spot rate)*(1+interest rate in US)/(1 year forward rate) after 1 year, which is 1*0,9*(1+3%)/0.8=1.15875CAD. The principal and interest to be repayed will be 1CAD*(1+interest rate in Canada), which is 1*(1+4%)=1.04CAD. After repaying the 1.04CAD, the company will still have a positive profit of 1.15875-1.04=0.11875CAD. Thus we can make an arbitrage profit.