You are the treasurer of Trade and Investment Ltd in Melbourne The management of the company seeks your advice on probable future foreign exchange rates in MYR to AUD You have collected the following information Malaysia AUD Annual interest rate 6 40 3 60 Annual inflation rate 4 20 2 60 Current spot rate is MYR2 8370 AUD One year forward rate is MYR2 9588 AUD Required Estimate the one year forward rate of the AUD assuming that interest rate parity (IRP) holds Is AUD on a discount or on a premium Your company plans to use a forward contract to hedge MYR two million that the company have to pay in one year to settle an import transaction Determine, whether the offered rate is reasonable or not Explain Explain whether there are any other factors to be considered before making any decision on the current market forward rate Differentiate international Fisher effect (IFE) from the purchasing power parity theory Is there any potential for Australian investors to profit from covered interest rate arbitrage If so, briefly explain the steps you would take in order to make profits If an investor expects the AUD to depreciate heavily against the MYR t, what are the other alternative ways of having interest rate arbitrage

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Posted on Oct 06, 2024

You are the treasurer of Trade and Investment Ltd in Melbourne. The management of the company seeks your advice on probable future foreign exchange rates

You are the treasurer of Trade and Investment Ltd in Melbourne. The management of the company seeks your advice on probable future foreign exchange rates in MYR to AUD. You have collected the following information:

Malaysia AUD

Annual interest rate 6.40% 3.60%

Annual inflation rate 4.20% 2.60%

Current spot rate is MYR2.8370/AUD

One-year forward rate is MYR2.9588/AUD

Required:

Estimate the one-year forward rate of the AUD assuming that interest rate parity (IRP) holds. Is AUD on a discount or on a premium?
Your company plans to use a forward contract to hedge MYR two million that the company have to pay in one year to settle an import transaction. Determine, whether the offered rate is reasonable or not. Explain.
Explain whether there are any other factors to be considered before making any decision on the current market forward rate.
Differentiate international Fisher effect (IFE) from the purchasing power parity theory.
Is there any potential for Australian investors to profit from covered interest rate arbitrage? If so, briefly explain the steps you would take in order to make profits.
If an investor expects the AUD to depreciate heavily against the MYR t, what are the other alternative ways of having interest rate arbitrage?