Question

Use this diagram for the questions that follow. The US$ 10,000,000 trading authority is equivalent to a trading authority of S$13,627,691.

Spot rate (US$/S$): 0.7338

90-day forward (US$/S$): 0.7301

90-day US$ LIBOR: 3.00%

90-day S$ LIBOR: 6.50%

Trading Authority (US$ equivalent): US$10,000,000

What is the S$ forward premium (+) or discount (-)? Use the standard way of expressing interest rates as in 4.88%.

What is the US$ - S$ interest rate differential?

During the investment horizon of 90 days you would be an owner of ________. Express your answer in terms of US$ or S$.

During the investment horizon of 90 days you would be a borrower of _________. Express your answer in terms of US$ or S$.

At the end of the 90 day investment horizon your investment would have grown to, ________. Express your answer in terms of US$ or S$.

At the end of the 90 day investment horizon your loan would have grown to _________. Express your answer in terms of US$ or S$.

At the end of the 90 day investment horizon, after you paid off your loan, your profit would be ________. Express your answer in terms of either US$ or S$.

Answer 1

* S$ Forward Premium / Discount = (FR-SR)/ SR* 100 * 360 days / Forward Period

= (0.7301 - 0.7338) / 0.7338 *100 *360/90

= -2.02% i.e Discount

* US$- S$ Interest Rate Differential = US$ LIBOR - S$ LIBOR

= 3% - 6.5% = -3.5%

* Owner of

Here S$ is at Discount of -2.02% and S$ LIBOR Interest rate is at premium of 3.5%.

Thus we Should Invest in S$ and Borrow in US$

Thus Owner of S$ 13,627,691.

* Borrower of US$ 10,000,000.

* At end of 90 days, Investment = S$ 13,627,691 (1 + 6.5/100*90/360) = S$ 13,849,141 (Approax.)

Converting into US$ using Forward rate = S$ 13,849,141 * 0.7301 = US$ 10,111,257.8.

* At end of 90 days , Loan Amount = US$ 10,000,000 * (1 +3/100*90/360) = US$ 10,075,000

* Profit after patying Loan = 10,111,257.8 - 10,075,000 = US$ 36,257.8