(a) Discuss how differences in inflation rate and interest rate between Malaysia and Australia will influence the exchange rate. (7 Marks) (b) Discuss the condition for interest rate parity to exist between Malaysia and Australia. (7 Marks) (c) Explain whether covered interest arbitrage is feasible for Malaysian investors if the Australian dollar's forward rate exhibits a premium of 5 percent. (7 Marks) (d)Discuss whether the forward premium should change in order to maintain interest rate parity if Malaysian interest rate decreases to 8 percent. Assume that the Australian dollar's forward rate currently exhibits a premium of 3 percent and that interest rate parity exists. (7 Marks) (e) Explain the theory of purchasing power parity, and determine the amount of ringgit that KB will need to exchange for AUD1 million in a year according to purchasing power parity. Assume KB does not purchase the forward contract. (7 Marks)

Answer rating: 100% (QA)

Answer a Differences in inflation rate and interest rate between Malaysia and Australia will influence the exchange rate as follows Higher inflation rate in Malaysia compared to Australia will lead to ... View the full answer