Need help with forward premium INTEREST RATE PARITY, FORWARD PREMIUM AND EXPECTE

Question

Need help with forward premium

INTEREST RATE PARITY, FORWARD PREMIUM AND EXPECTED FORWARD RATES The 1-year interest rate in Singapore is 11%. The 1-year interest rate in the U.S. is 6%. The spot rate of the Singapore dollar (S$) is $0.50 and the forward rate of theS$ is $.46 (this is USD/SS). Assume zero transaction costs a) What is the expected forward premium or discount? Show all work below, then put final answer in the above bax. ih P=(1+h)/(1+in-1=-0.04505 Explain and show al necessary backup calculations. Interest rate parity exists between the U.S. and Poland (its currency is the zloty). Assume that there is zero probability of any financial or political problem in either country such as a bank default or government restrictions on bank deposits or currencies. Melvin is from Poland and plans to invest in the U.S. What is Melvin's return if he invests in the U.S. and covers the risk of his investment with a forward contract (put your answer in thegreen box below)? Hint: There is no major math here and you have all the info you need. one-year risk-free CD (deposit) rate in the U.S 7.00% one-year risk-free CD rate in Poland (denominated in the zloty) 5.00%

Explanation / Answer

As per Interest rate parity the country having lower interest rate the currency of that country is at forward premium on covered basis. US$ is at the forward premium on covered basis because the interest rate is lower.

Forward premium on US$=Difference in interest/Interest rate factor

=5/1.06=4.72%

Forward discount on singapore dollar=5/1.11=4.50%

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