Q. Interest rates are 7% in the U.S. and 4.25% in Canada. Jacque carry trader borrows C$10,000,000 to execute a carry trade. At the start, the exchange rate is C$1.085/$. After one year, the exchange rate is C$1.071/$.
A. What is Jacque's C$ profit or loss over the year?
B. When Jacque starts this trade, she is hoping that the Canadian dollar doesn't ______________.
C. When Jacque starts this trade, she is hoping that the USD doesn't ______________.
D. If the C$ had not appreciated or depreciated over the year (stayed at C$1.085/$) verify that Jacque would have made C$275,000. What's special about C$275,000? You'll see if you take the interest rate differential (7 - 4.25% = 2.75%) and multiply that percentage profit by the amount of Canadian dollars Jacque borrowed. (2.75% of 10 million is 275,000)
E. What is the BEEX in one year?