Assume you are a foreign exchange trader

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

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.