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Compute the annualised discount or premium on myr relative

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Reference no: EM132746180

Assume you are a foreign exchange trader. You noticed the following quotes.

Spot rate : MYR4.00/USD 180-day

forward rate : MYR4.15/USD

180-day interest rate in Malaysia : 8% per annum

180-day interest rate in US : 5% per annum

Problem a. Compute the annualised discount or premium on the USD relative to the MYR.

Problem b. Compute the annualised discount or premium on the MYR relative to the USD.

Problem c. Is there an incentive for covered-interest arbitrage? Support your answer with calculations.

Problem 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.

2. The 6-month interest rate on USD deposits was about 5% per annum on March 15, 2020. The exchange rate on that date was MYR4.20/USD. Six months (180 days) later, it was MYR4.15/USD. What was the total 6-month return in percentage to a Malaysian investor in local percentage on money deposited in a USD account?

Reference no: EM132746180

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