Is interest rate parity holding

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Reference no: EM132002160

The six-month interest rate for the Canadian $ is 9% when the six-month interest rate for the US $ is 6.75%. At the same time the spot Canadian $ quotation in New York is US $0.9100 and the six-month forward rate is US $0.9025.

(a) Is interest rate parity holding? Why?

(b) If not, how could advantage be taken of the situation?

(c) If a large number of operators decide to do the arbitrage suggested under (b), what will the effect be upon spot and forward quotations and upon interest rates for the two currencies?

Reference no: EM132002160

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