Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Jack, a Singaporean business man, has to pay USD 780,000 to his trading partner from the US in 6 months' time. He obtained the following


Jack, a Singaporean business man, has to pay USD 780,000 to his trading partner from the US in 6 months' time. He obtained the following information from the bank:



Spot SGD/USD:   (Bid) 1.4135  (Ask)1.4140

6 month forward SGD/USD:   (Bid) 1.4105 (Ask)1.4110



(a) Suppose Jack can get a 2% interest rate for a 6 month USD deposit, solve for the interest rate for a 6 month SGD deposit so that Jack will be indifferent to exchanging the USD now or in 6 months' time. (Note: The 2% is not an annual rate but is applicable for the 6-month period.) (8 marks)



(b) Suppose Jack decides not to use the forward market to hedge the exchange rate risk but use the futures market instead. Explain one (1) advantage and one (1) disadvantage of using each method. (12 marks)

Step by Step Solution

3.44 Rating (147 Votes )

There are 3 Steps involved in it

Step: 1

a To determine the interest rate for a 6month SGD deposit that would make Jack indifferent to exchanging USD now or in 6 months time we need to calcul... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Information Systems basic concepts and current issues

Authors: Robert Hurt

3rd edition

130855849X, 978-1308558493, 78025338, 978-0078025334

More Books

Students also viewed these Finance questions

Question

19. How does L-dopa relieve the symptoms of Parkinsons disease?

Answered: 1 week ago