Given the information: Interest rate in US (Rh): Interest rate in Canada (Rh): Line of credit in US Line of credit in Canada 12,500,000 The spot rate for CAD (SO): 1-year forward rate for CAD (FR): 7% 5% USD 10,000,000 CAD $0.80 $0.812 What is your covered rate of return from US (Rch)? 6.575% . What is your covered rate of return from Canada (Rcf)? 5.419% If you wanted to set up a covered interest rate arbitrage, you should borrow in and invest in CAD; USD O Based on your recommended investment strategy your covered interest arbitrage profit should be: CAD 52,340 12,500,000 x 1.05 = CAD 13,125,000 10,000,000 x 1.07 = USD 10,700,000 USD 10,700,000 / 0.812 = CAD 13,177,340 13,177,340 - 13,125,000 = 52,340.