Question

5. One-year interest rates are 2% in the U.S. and 5% in Canada. “Jackie the carry trader” borrows $3,000,000 to execute a carry trade. At the start, the exchange rate is $.881/CAD. After one year, the exchange rate is $.865/CAD
A. What is Jackie’s USD profit or loss over the year?



B. When Jackie starts this trade, she is hoping that the Canadian dollar doesn’t ______________.




C. When Jackie starts this trade, she is hoping that the USD doesn’t
______________.




D. What is the BEEX in one year? (place in terms of USD/CAD to 4 decimal places)

Answer 1

A)

• Firstly convert $3000000 into CAD

          So, CAD is 3405221.33938

• Invest CAD  in Canada 5% for 1 year
• In t= 1yr realize canadian investment with interest so, CAD  on maturity

        = CAD 3405221.33938 (1+ 0.05)

        = CAD 3575482.40634

• Again now convert CAD into US $ so, equivalent  US $ realised on conversion = CAD 3575482.40634 * $0.865/ CAD

                            = $ 3092792.28148

• US repayment = $ 3000000*(1+ 0.02)

                                  = $ 3060000

That's why,

Profit over the year = $3092792.28148- $3060000

                                  = $32792.28148

B) doesn't depreciates relative to USD

C) appreciates relative to Canadian dollar

D) BEEX = US$ borrowings to be repaid with interest/ CAD realized with interest on maturity

               = $3060000/ CAD 3575482.40634

               = 0.8558

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