Question
The economy of Thailand and Singapore has been described as very integrated, due to their geographical and historical reasons. Likewise, their capital markets are integrated
The economy of Thailand and Singapore has been described as very integrated, due to their geographical and historical reasons. Likewise, their capital markets are integrated as well. Hence, investors in both countries require the same real interest rate of 3.5% on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 3.0% in Thailand and 1.5% in Singapore for the next three years. The spot exchange rate is currently 3.00/S$.
(i) Explain how Fisher effect can help to describe the relationship between interest rates and inflation rates, using the information given above.
(ii) What is the nominal interest rate per annum in both thailand and Singapore, assuming that the Fisher effect holds.
(iii) Predict the expected spot Thailand -Singapore dollar exchange rate three years from now.
(iv) Can you infer the forward ringgit Malaysia-Singapore dollar exchange rate for one year maturity?
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