**Arbitrage in Montreal**

**What principle links the four prices? What is the relevant mathematical formulation?**

The relevant mathematical formulation for linking the four prices is the IRP (Interest Rate Parity) theorem:

In the theorem S stand for spot rate, F stand for forward rate, IF stand for the interest rate of foreign currency and ID stand for interest rate of domestic currency.

**Identify any arbitrage opportunities and explain how they might have come about.**

Spot rate CAD 1.1520/USD

6M forward rate CAD 1.1635/USD

6M CAD money market rate 10%

6M USD money market rate 7.50%

Now putting the values in theorem

It can be seen that the theorem did not proved true which indicates that the arbitrage opportunity does exist.

**How would you build up an arbitrage position? Describe your strategy and its mechanics.**

**Solution**

**Amount 10000000 will be converted into dollars **

Therefore borrow $8680555.55

**Repayment of interest**

Now $8680555.55 will be converted in CAD on spot rate that is equivalent to 10000000

**Now 10500000 will be sold on Forward Rate**

**Profit**

**Calculate your profit resulting from the preceding arbitrage strategy.**

As the main currency is Canadian Dollar the profit is evaluated in CAD

16718.67 * 1.1635

=19452.17