Suppose that the risk-free rates in the United States and in Canada are 3% and 5%, respectively. The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$. What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.
A. $1.00/C$
B. $1.70/C$
C. $0.88/C$
D. $0.78/C$
E. $1.22/C$
D. $0.78/C$
$0.80(1.03/1.05) = $0.78/C$.
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