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Sylvia is a foreign exchange dealer for a bank in London. She has 2,000,000 (or its Singapore dollar equivalent) for a short-term money market investment.

Sylvia is a foreign exchange dealer for a bank in London. She has 2,000,000 (or its Singapore dollar equivalent) for a short-term money market investment. She wonders if she should invest in pounds sterling or make a covered interest arbitrage investment in the Singapore dollar. The following information were given:

Spot exchange rate SGD/GBP 0.4816/S$

90-day forward rate SGD/GBP 0.4803/S$

UK interest rate 3% per annum

Singapore interest rate 5% per annum

Assuming a year 360 days and no transaction costs or taxes exist, recommend to Sylvia where she should invest her money. Support your answer with relevant calculations including the arbitrage profit/loss in pound sterling.

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