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Suppose a Canadian bond portfolio manager wishes to enhance his yield on Canadian short-term bills. Current one-year Canadian T-Bills yield 13%. The...

Suppose a Canadian bond portfolio manager wishes to enhance his yield on Canadian short-term bills. Current one-year Canadian T-Bills yield 13%. The current spot rate is C$ 1.40/$. The one-year forward rate is C$ 1.50/$. The US one-year T-Bill rate is 6%. What is the Canadian T-Bill rate implied by interest rate parity? What percentage yield could the portfolio manager obtain by creating synthetic Canadian T-Bills i.e. exploiting the arbitrage opportunity?

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*Canadian T-Bill rate directly represents the changes in the interest rates in Canada and creates the... View the full answer

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