(a) The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the United States is 6 percent. The spot rate of the Singapore dollar (S$) is $.50 and the forward rate of the S$ is $.46. Assume zero transaction costs.

(i) Does interest rate parity exist?

(ii) Can a U.S. firm benefit from investing funds in Singapore using covered interest arbitrage?

(b) Purchasing power parity (PPP) implies that real exchange rates remain constant. If PPP holds, do firms need to hedge their long-term foreign exchange exposure? Explain.

(Please provide detailed answers)