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 = 12% 1-year deposit rate offered on Singapore dollars= 10% 1-year forward rate of Singapore dollars = $0.412 Spot rate of Singapore dollar = $0.400 Should a U.S. based investor Covered interest arbitrage and invest in Singapore? Answer a. No because the return would be 13.3% b.No because the return would be 14.23% c.Yes because the return would be 14.23% Yes because the return would be 13.3% .

Explanation / Answer

If investor invests in Singapore. The returns will be as follows:
$1 mn / 0.400 * 1.10 * .412 = $ 1.133 => 13.33 % returns which is more than the 12% in the US

Hence, the the answer is:
Yes because the return would be 13.3% .

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