Question
Suppose the 12-month interest rates on simple deposits in Singapore Dollars and US Dollars are 15% and 1% are respectively. Current exchange rate, E SG/$,
Suppose the 12-month interest rates on simple deposits in Singapore Dollars and US Dollars are 15% and 1% are respectively. Current exchange rate, E SG/$, is 15 SG/$. A Singaporean investor has 15,000 SG which she wants to deposit into one of these two options. a. Suppose the investor expects the SG to depreciate by 10 percent in a year. Which option will she choose to invest her money in? Provide your answer using the following the two ways: i) first calculate the expected gross returns in SGs in each option, and then convert them to expected rates ii) directly use the Uncovered Interest Parity condition, which is an approximation to the first method. b. Compare the differences in returns from two assets you calculated with two different methods (in % terms). How big is the error in the second method? c. Suppose the sudden geopolitical risks in the region worsened the expectations regarding the SGs depreciation against US Dollar to 20 percent. Analyze the resulting behavior of the SG/$ exchange rate graphically and explain the mechanism without using any algebra. Assume that the forex market is in an equilibrium initially. I need step by step answers.
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