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

Question

Assume the following information:

U.S. investors have $1,000,000 to invest
1-year deposit rate offered on U.S. dollars = 8.74%
1-year deposit rate offered on Singapore dollars= 12.00%
1-year forward rate of Singapore dollars = $0.400
Spot rate of Singapore dollar = $0.412

1. Is there any opportunity for covered interest arbitrage?

A. Yes because Singapore $ is trading at a premium of 3% and not 1.82% as per the IRP
B. No because Singapore $ is trading at a discount of 2.91% which is as per the IRP
C. No because Singapore $ is trading at a discount of 1.82% which is as per the IRP
D. Yes because Singapore $ is trading at a discount of 2.91% and not 1.79% as per the IRP



2. Is there any opportunity for covered interest arbitrage?

A. Yes because Singapore $ is trading at a premium of 3% and not 1.82% as per the IRP
B. No because Singapore $ is trading at a discount of 1.82% which is as per the IRP
C. Yes because Singapore $ is trading at a discount of 2.91% and not 1.79% as per the IRP
D. No because Singapore $ is trading at a discount of 2.91% which is as per the IRP

Explanation / Answer

1-(1.0874/1.12)=2.91% C. Yes because Singapore $ is trading at a discount of 2.91% and not 1.79% as per the IRP

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