Suppose That the Two-Months Interest Rate Is 8

question 12

Essay

Suppose that the two-months interest rate is 8.0 percent per annum in the Canada and 7.0 percent per annum in France,and that the spot exchange rate is $1.50/€ and the forward exchange rate,with one-year maturity,is $1.50/€.Assume that an arbitrager can borrow up to $1,000,000 or €666,666.
a)What kind of arbitrage is possible?
b)Determine the arbitrage profit that can be made.
c)What would the French interest rate have to be so that there would be no arbitrage opportunity?

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Definitions:

Refrigerant Vapor

The gaseous form of refrigerant, used in air conditioning and refrigeration systems to absorb and dispel heat.

Refrigerant R-1234yf

An environmentally friendly refrigerant with low global warming potential, designed for use in automotive air conditioning systems.

Frostbite

A condition that occurs when skin and other tissues freeze due to exposure to cold temperatures, potentially leading to permanent damage.

R-134a

A type of refrigerant commonly used in vehicle air conditioning systems, known for its low environmental impact compared to earlier refrigerants.