The current spot rate of Canadian dollar is $0.79 and it is expected to depreciate to $0.76 in 60 days. Interest rates of the two countries are as follows. Assume that borrowing rate and lending rate are the same each other in both countries.
Interest rate (annual)
U.S. dollar 2.5%
Canadian dollar 4.5%
Hedge Fund is considering to carry out a speculation by borrowing C$1 million from Canadian money market, based on the expected spot rate of Canadian dollars (C$).
(1) In addition to borrowing C$1 million now, what is the other action for E.J. Hedge Fund to take now? What is the action that the Fund plans to take in 60 days?
(2) Compute the expected speculative profit from this operation.