Arbitrage in Econ

Any shortcut for when to borrow domestic or Foreign. I always get confuse with this kind of question.

One way to ensure you get these questions right is to compare the results of two investors, one who stays in the domestic currency and one who makes a foray into the foreign currency. For example, assume spot is $1.25 USD/CDN, forward is $1.3 USD/CDN, US interest rate is 5% and Canadian interest rate is 6%. The US domestic investor takes $1000 and invests it in the US at 5%, getting $1050 at the end of the year. The US cross-border investor exchanges $1000 US at spot to get $800 Canadian, which grows to $848 at the Canadian rate of 6%, then exchanges back at the forward to get $1102.4. The cross-border investor did a lot better than the domestic investor. That means investing in Canada is better and you should borrow at the US rate to do so. It makes intuitive sense too, since the Canadian interest rate is higher and the Canadian currency is also appreciating. This method may not be the fastest, but it ensures a correct answer.