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Homework answers / question archive / Assume you are a foreign exchange trader
Assume you are a foreign exchange trader. You noticed the following quotes. Spot rate 180-day forward rate 180-day interest rate in Malaysia 180-day interest rate in US : MYR4.00/USD : MYR4.15/USD : 8% per annum : 5% per annum a. Compute the annualised discount or premium on the USD relative to the MYR. (1.5 marks) b. Compute the annualised discount or premium on the MYR relative to the USD. (1.5 marks) C. Is there an incentive for covered-interest arbitrage? Support your answer with calculations. (3 marks) d. Assume: (1) you are willing to borrow USD4,000 or MYR16,000; and (2) there are no transaction costs. Indicate your strategy on how to obtain the covered-interest arbitrage profit in 180 days. Support your answer with calculations.
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