Suppose that you are a trader at Morgan Stanley in Shanghai, you see the following prices.

Rate When you invest When you borrow

CNY Annual Interest Rate $8\%12\%$

MYR Annual Interest Rate $14\%17\%$

Rate Bid Ask

Spot Rate MYR$0\mathrm{.}63/$CNY MYR$0\mathrm{.}66/$CNY

$1-$year Forward Rate MYR$0\mathrm{.}60/$CNY MYR$0\mathrm{.}64/$CNY

Which of the following statements is correct?

Question $12$Answer

a$.$

You can earn positive return by borrowing from Malaysia $($MYR$)$ and investing in China $($CNY$).$

b$.$

CNY is at forward premium.

c$.$

There is no arbitrage opportunity, thus, Interest Rate Parity hold.

d$.$

You can earn positive return by borrowing from China $($CNY$)$ and investing in Malaysia $($MYR$).$