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?