Assume that the one-year interest rate in Singapore is 2 per cent. The one-year Australian interest rate is 4 per cent. The spot rate of the Singapore dollar (S$) is A$0.9776. The forward rate of the Singapore dollar is A$1.0465.

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a. Is covered interest arbitrage feasible for Australian investors? Show the results if an Australian company engages in covered interest arbitrage to support your answer. b. Assume that the spot rate and interest rates remain unchanged as coverage interest arbitrage is attempted by Australian investors. Do you think the forward rate of the Singapore dollar will be affected? If so, state whether it will increase or decrease, and explain why.