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Covered Interest Arbitrage (CIA)
Given the following:
US 90-day interest rate 5%
Canadian 90-day interest rate 10%
Current Spot Rate $0.8512/C$
90-day Forward Rate $0.8501/C$
You have $1 Million and would like to engage in CIA:
i) Outline the steps for CIA with the appropriate computation thereof and compute the profit.
ii) Compute the Return on Investment of $1 million and identify its components:
a) Interest Rate Component and
b) Exchange Gain/Loss Component
iii) For Interest Rate Parity to prevail, what should be the forward rate of the C$?
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