Suppose the expected exchange rate of the yen

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Suppose the expected exchange rate of the yen in terms of Canadian dollars is E e CAD/Y en = 0.0106 and that the spot price of of the yen in terms of Canadian dollars is ECAD/Y en = 0.01. Next, suppose that currently the annual interest rate in Canada is 2%, while the annual interest rate in Japan is 1%. Is there an arbitrage opportunity here? If so, explain exactly how you would take advantage of this situation to make profits. To answer this question assumed that there are no transactions costs and DO NOT use the approximation of the uncovered interest parity to answer this problem (use the exact formula).

Reference no: EM131186532

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