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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%
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?
(15 Marks)
c)
Why transaction in (b) is risky to a foreign currency trader? Clearly state an
example to justify your answer.
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