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Arbitrage Questions
In view of the Coronavirus epidemy, the Bank of Canada along with most advanced nations’ central banks has cut its policy interest rate by 1.5% to 0.25%.
Suppose an economy under fixed (pegged) exchange rates is currently facing:
Consider world consisting of two trading entities: the US and the EU. The EU is the exporter of cheese to the US and the importer of oil from the US. Assume the world price of both cheese and oil are set in terms of dollars ($). Also assume that there is
Suppose that on January 1, the Yen price of the dollar is 95 (C$1= ¥100). Over the year, the Japanese inflation rate is 5%, and the Canadian inflation rate is 7%. At the end of the year, the exchange rate is C$1 = ¥98.
Assuming that bond rating agencies, such as Moody’s and Standard & Poor’s, have rated the government bonds of the US, Canada, Switzerland, and Germany
Suppose a Canadian agent (investor) with C$1.0 million is choosing between bank deposits denominated in either euro or Canadian dollars.
(a) Determine if there is a currency arbitrage opportunity in this 3-currency situation.
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