Reference no: EM132802581

Questions -

Q1. Assume you are a foreign exchange trader. You noticed the following quotes.

Spot rate: MYR4.00/USD 180-day

Forward rate: MYR4.15/USD

180-day interest rate in Malaysia: 8% per annum

180-day interest rate in US: 5% per annum

a. Compute the annualised discount or premium on the USD relative to the MYR.

b. Compute the annualised discount or premium on the MYR relative to the USD.

c. Is there an incentive for covered-interest arbitrage? Support your answer with calculations.

d. Assume: (1) you are willing to borrow USD4,000 or MYR16,000; and (2) there are no transaction costs. Indicate your strategy on how to obtain the covered-interest arbitrage profit in 180 days. Support your answer with calculations.

Q2. The 6-month interest rate on USD deposits was about 5% per annum on March 15, 2020. The exchange rate on that date was MYR4.20/USD. Six months (180 days) later, it was MYR4.15/USD. What was the total 6-month return in percentage to a Malaysian investor in local percentage on money deposited in a USD account?

Q3. The measurement of all international economic transactions that take place between the residents of a country and foreign residents is called the balance of payments (BOP). Explain two (2) reasons why host-country BOP data is important to managers and investors.

Q4. Assume you are a Malaysian investor with MYR100,000 to invest. You notice that Bank A is buying MYR at MYR4.8180/EUR and selling MYR at MYR4.8170/EUR. Similarly, you observe that Bank B is buying SGD at MYR2.8530/SGD and is willing to sell SGD at 3.1730/SGD. Next, you find that Bank C is selling EUR at SGD1.5170/EUR and willing to buy EUR at 0.033% below the selling price. Calculate the profit.

Q5. Here are some quotes for spot exchange rates and three-month interest rates: Spot exchange rates:

MYR/SGD 3.1865 - 3.1875

Yen/MYR 25.10 - 25.20

Interest rates: Three-month MYR 5 - 51/4

Three-month SGD 31/4 - 31/2

Three-month Yen 11/4 - 11/2

a. Suppose that a Singaporean investor that wants to convert SGD1,000,000 into Yen. Using the quotes above, how much Yen will the investor get?

b. Suppose that a Japanese investor that wants to convert Yen1,000,000 into SGD. Using the quotes above, how much SGD will the investor get?

c. What are the supposed quotes for SGD/MYR three-month forward exchange rates?

d. What are the supposed quotes for Yen/SGD three-month forward exchange rates?

Q6. James bought a 3-month British pound futures contract for USD1.4400/Pound only to see the dollar appreciates to a value of USD1.4250 at which time he sold the pound futures.

a. If each pound futures contract is for an amount of 62,500 Pound, how much money did James gain or lose from his speculation with pound futures?

b. If this is an options contract, what will be the profit or loss?

Q7. By using demand and supply graphs, discuss how interest rate differential between Malaysia and Thailand can both weaken and strengthen Malaysian Ringgit against Thai Baht with relevant theories.