Ans : a) Premium = 0.075% , b) Discount = - 0.07229%

		spot rate	Forward rate	Prem / (disc) (F-S)	Prem/(Disc) %for 180 days	Annualised premium/(disc)
MYR/USD	180 days	4.000	4.15000	0.15000	0.03750	0.07500
USD/MYR	180 days	0.250	0.24096	-0.00904	-0.03614	-0.07229

Ans for part c : Formula for Covered Interest Rate Parity

      S ( 1+ iDomestic) = F ( 1 + iForeign)

i. S is the spot exchange rate between the two currencies = 4.00 MYR/USD

ii. F is the forward exchange rate between the two currencies = 4.15 MYR/USD

iii. iDomestic is the domestic nominal interest rate = 8% or 0.08 (p.a.)

iv. iForeign is the foreign nominal interest rate = 5% or 0.05 (p.a.)

Now, Plug the values

      S ( 1+ iDomestic) = F ( 1 + iForeign)

Or , 4 (1 + 0.08 * 180/360) = F ( 1+ 0.05 * 180 /360)

Or , 4 * 1.04 = F * 1.025

Or , F = 4.0585 ( Expected Price or Should Be price )

But Actual forward Rate is 4.15 MYR/USD , It means $ is a Stronger Currency , So we should Invest in stronger Currency and Borrow in Weaker Currency .

Steps to be followed :

1) Borrow a Notional Amount for 180 days ( Period of forward ) in weaker currency say X (i.e we will pay interest on it)

2) Now Convert Step 1 Amount ( X) at Spot exchange rate i.e. we will now have the other currency in hand say Y.

3) Invest the converted Y amount in the other country for the same period i.e. 180 days ( S1) and Immediately enter into a Forward sell agreement for an amount equal to (Y + int ) = Z on it for 180 days

4) Now It means that after 180 days we will receive Z , which we have already sold in Forward contract and will get a New Amount say P and repay the loan borrowed in step 1 with interest on it say Q .

5) Arbitrage Profit = P - Q

1	Borrow 1,000,000 ( X) MYR @ 8% p.a.	Interest payable on it will be 1,000,000 * 8% * 180 /360 = 40000 Total amount repayable = 1,040,000 (Q)
2	Convert 1,000,000 (NOT 1,040,000) at Spot rate i.e 4 MYR /USD	We will get = 1,000,000 / 4 = $ 250000 ( Y)
3	Invest the Converted Amt $ 250000 in US @ 5% p.a.	Interest on it = $ 250000*5%*180/360 = $ 6250
3	Enter into a Forward sell agreement for $256250 (Z) ($250000 + 6250 ) at 4.15 MYR/USD ( Since This amount we will recv in 180 days )
4
5	We will receive MYR = $256250 * 4.15 = 1063437.5 MYR (P) for which had entered in forward contract in step 3.
5	Arbitrage Profit = 1063437.5 - 1,040,000 MYR = 23437.5 MYR (P-Q)

AnS D ) Since I have already proved in point 3 above that what will be the steps , just replace 1,000,000MYR with 16000MYR and rest will come along.

1	Borrow 16000 ( X) MYR @ 8% p.a.	Interest payable on it will be 16000* 8% * 180 /360 = 640 Total amount repayable = 16640 (Q)
2	Convert 16000 (NOT 16640) at Spot rate i.e 4 MYR /USD	We will get = 16000 / 4 = $ 4000 ( Y)
3	Invest the Converted Amt $ 4000 in US @ 5% p.a.	Interest on it = $ 4000 *5%*180/360 = $ 100
3	Enter into a Forward sell agreement for $4100 (Z) ($ 4000 + 100 ) at 4.15 MYR/USD ( Since This amount we will recv in 180 days )
4
5	We will receive MYR = $4100 * 4.15 = 17430 MYR (P) for which had entered in forward contract in step 3.
5	Arbitrage Profit = 17430 - 16640 MYR = 790 MYR (P-Q)