Consider the following facts about Singapore dollar:

The current spot exchange rate is SGD1.40/USD.

Over the next 180 days, there is a 20% probability that the SGD will strengthen relative to the dollar by 3%, and there is a 80% probability that the SGD will weaken by 9%.

Required:

a. What is the expected future spot exchange rate of USD per SGD? (4 marks)

b. Suppose that the 180-day forward rate is SGD1.42/USD.

i) What contract would you make to speculate in the 180-day forward market by either buying or selling SGD 1,000,000? (3 marks)

ii) Calculate your expected US dollar profit in the 180-day forward market using SGD 1,000,000 (forward speculation). (1 mark)

c. Given that the rate of change in the exchange rate is conditionally normally distributed, if the standard deviation of the 180-day rate of appreciation of the SGD relative to the USD is 3%, what range covers 95.45% of your possible US dollar profits and losses? (Note: Use the unit of SGD 1,000,000) (6 marks)