\' Verizon 7:09 PM * 86%- PROBLEM 2 Questions 33-35 Assume the following informa
ID: 2583526 • Letter: #
Question
' Verizon 7:09 PM * 86%- PROBLEM 2 Questions 33-35 Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars-12% 1-year deposit rate offered on Singapore dollars-10% 1-year forward rate of Singapore dollars S.412 Spot rate of Singapore dollar $.400 Then: O interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. O interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. O interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. O interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. 7 points
Explanation / Answer
Problem 2: The answer is the 2nd option: "interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically".
Calculations:
$1,000,000/$.400= S$2,500,000*(1.1)
= S$2,750,000*$.412 = $1,133,000
Yield = ($1,133,000-$1,000,000)/$1,000,000 = 13.3%
This yield exceeds what is possible domestically.
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