a) Suppose that you have MYR1,000,000 to invest for three months either in

Malaysia at the interest rate of 12% per annum or United States at 8% per

annum. The current spot rate is MYR 4.4215/USD and 3 month forward rate is

MYR4.4320/USD. Where should you invest?

b) Currently, the spot rate is USD 0.2256/MYR and 3- month future spot rate is

USD 0.2270/ MYR. Interest rate in the US is 7% per annum while the interest

rate in Malaysia is 4% per annum. Assume that you can make borrowing either

USD1,000,000 or MYR4,432,624. Does interest rate parity (IRP) exist in this

situation? If IRP does not exist, how is it possible to earn profit from this

situation?

c) Why transaction in

(b) is risky to a foreign currency trader? Clearly state an

example to justify your answer