Question

Using the information below, what will be the spot rate of the Singapore dollar (USD/SGD) in three years based on the international fisher effect (=UIRP)? KEEP AT LEAST TWO DECIMALS

Spot Exchange rate of the Singapore dollar (USD/SGD) =0.71

Three-year annualized IR in the U.S. ( i.e., annual rate expected each year over the following three years), in% = 3.6

Three-year annualized interest rate in Singapore (%) =0.62

Answer #1

International Fisher Effect | Remarks |

When F1= Forward Rate Foreign Currency per USD | To be derived |

S0= Spot Rate Foreign Currency per USD | =1/0.71=1.408 SGD/USD |

rFC = Interest rate Foreign Currency | 0.62% |

rUS = Interest Rate USD | 3.60% |

t=Time period | 3 yrs |

Interest Rate Parity =IPR formula : | |

F1/S0= (1+rFC)/(1+rUS) | |

or F1=S0[1+(rFC-rUS)] | |

so , F1=1.408*[1+(0.62%-3.6%)] | |

F1=1.366 SGD/USD =1/1.366 USD /SGD=0.732 USD/SGD | |

So Spot Rate in 3 years would be 0.732 USD/SGD | |

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