Suppose the exchange rate for Singapore (dollar (SGD) is currently SGD1.36 per U

Question

Suppose the exchange rate for Singapore (dollar (SGD) is currently SGD1.36 per USD. If the interest rate in the US is 3%, and the interest rate in Singapore is 6%, then what must be the forward rate be to prevent covered interest rate arbitrage?
Suppose the exchange rate for Singapore (dollar (SGD) is currently SGD1.36 per USD. If the interest rate in the US is 3%, and the interest rate in Singapore is 6%, then what must be the forward rate be to prevent covered interest rate arbitrage?
Suppose the exchange rate for Singapore (dollar (SGD) is currently SGD1.36 per USD. If the interest rate in the US is 3%, and the interest rate in Singapore is 6%, then what must be the forward rate be to prevent covered interest rate arbitrage?

Explanation / Answer

using interest rate parity the formula for forward rate = spot rate *(1+interest rate in foreign currency)^n / (1 + interest rate in home)^n

here,

US is home

Singapore is abroad.

n is number of years, since nothing is given we assume it to be 1 year.

now,

forward rate = 1.36 * (1.06)^1 / (1.03)^1

=>SGD 1.40 /USD.

the forward rate to prevent interest rate arbitrage = SGD1.40 per USD.

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