Sayang Selasih Berhad is given the following quotes: Spot rate USD0.7250/NZD Six-month forward rate USD0.7350/NZD Interest rate United States 7 percent per annum Interest rate New Zealand 6 percent per annum Assume that Sayang Selasih Berhad can borrow as much as USD1 million or NZD5 million for its coming project. If Interest Rate Parity (IRP) is not holding, determine how would Sayang Selasih Berhad carry out covered interest arbitrage (CIA) opportunity and compute the profit. Different interest rate = 7% - 6 % = 1% p.a. = 3.5% - 3% = 0.5% 6-month

Sayang Selasih Berhad is given the following quotes: Spot rate USD0.7250/NZD Six-month forward rate USD0.7350/NZD Interest rate United States 7 percent per annum Interest rate New Zealand 6 percent per annum Assume that Sayang Selasih Berhad can borrow as much as USD1 million or NZD5 million for its coming project. If Interest Rate Parity (IRP) is not holding, determine how would Sayang Selasih Berhad carry out covered interest arbitrage (CIA) opportunity and compute the profit. Different interest rate = 7% - 6 % = 1% p.a. = 3.5% - 3% = 0.5% 6-month

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 11QA

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One year borrowing and deposit interest rates are 12.5% and 10.5% respectively in the US and 10.5% and 8.5% respectively in Germany. The spot exchange rate for the US dollar is $1.50 to the EURO. The 12-month forward rate is $1.55.i) Assuming you do not have any initial investment funds, suggest a way you might profit from the pricing inconsistency presented above. Start with a borrowing amount and then explain and calculate the gain/loss with the rates that you will borrow and deposit.ii) Will the situation persist forever? Explain your answer.
Currently, the spot rate is RM4.2000/USD and the one year forward rate is RM4.1000/USD. Interest rate in United States is 3% per annum and in Malaysia is 2% per annum. Assume that you can borrow as much as USD100,000 or RM420,000 for your coming project. If Interest Rate Parity (IRP) is not holding, determine how would you carry out covered interest arbitrage (CIA) and compute the profit.
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