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Is there an incentive for covered-interest arbitrage

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Reference no: EM132746206

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

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

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

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

Reference no: EM132746206

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