Question 4 Exchange Rate

Your forex dealer quoted the following exchange rate for spot, the one month RM/US$ rates and RM/ rates :

RM / US$	3.9954/62	55/63
RM /	5.5020/32	56/48

Three month interest rate in Malaysia is 5%, in the United States is 6% and in United Kingdom is 4%.

How many ringgit would you receive if you exchange with US$ 115,000 for delivery in three months?

(4 marks)

How many would you exchange with RM 120,000 for delivery in three months?

(4 marks)

What is the annualized premium (discount) on the month bid forward RM/ rate?

(4 marks)

What is the percentage spread of the RM/ one month forward quotation?

(3 marks)

If the spot rate US/ is 1.3732/61 were quoted in London, what would you do to make profit on the US/ arbitrage?

(6 marks)

Analyze the conditions that will result in locational arbitrage and the realignments that will follow.