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: = 10% 1-year deposit rate offered on Singapore dollars= 12% 1-year forward rate of Singapore dollars = $0.400 Spot rate of Singapore dollar = $0.412 Is there any opportunity for covered interest arbitrage? Answer a.Yes because Singapore $ is trading at a discount of 2.91% and not 1.79% as per the IRP b.Yes because Singapore $ is trading at a premium of 3% and not 1.82% as per the IRP c.No because Singapore $ is trading at a discount of 2.91% which is as per the IRP No because Singapore $ is trading at a discount of 1.82% 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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