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Suppose the spot exchange rate between the United States and Canada is $1.06/C$. The continuously...

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Finance

Suppose the spot exchange rate between the United States and Canada is $1.06/C$. The continuously compounded interest rate in the U.S. is 4%, while the continuously compounded Canadian dollar-denominated interest rate is 7%. Suppose you observe a 10-month forward exchange rate of $0.89/C$. What transactions could you undertake to make money with zero initial investment and no risk?

a. No arbitrage is possible under these conditions.

imageb.Borrow Canadian dollars, convert to U.S. dollars, and invest in a U.S. dollar-denominated bill today. After 10 months, convert back to Canadian dollars at $0.89/C$ and pay off the loan.

c. Borrow U.S. dollars and invest in a U.S. dollar-denominated bill today. After 10 months, pay off the loan and convert the excess funds to Canadian dollars at $0.89/C$.

d.Borrow Canadian dollars and invest in a Canadian dollar-denominated bill today. After 10 months, pay off the loan and convert the excess funds to U.S. dollars at $0.89/C$.

e. Borrow U.S. dollars, convert to Canadian dollars, and invest in a Canadian dollar-denominated bill today. After 10 months, convert back to U.S. dollars at $0.89/C$ and pay off the loan..

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