Question 5 Jack, a 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 ask1.4140

6 month forward SGD/USD bid 1.4105 ask1.4110

(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)