Assume the following information: U.S. investors have $1,000,000 to invest: 1-ye

Question

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars 1-year deposit rate offered on Singapore dollars 1-year forward rate of Singapore dollars Spot rate of Singapore dollar 12% -10% $.412 $.400 O a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. O b. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. O c. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. 0 d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

Explanation / Answer

one year forward rate as per IRP = 0.4 * 1.12/1.10 = 0.4073

interest rate parity does not exist and covered arbotrage by US investors results in a yield above what is possible domestically

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