Question Details

Can a U.S. firm benefit from investing funds in Singapore 


1. Change in the Forward Premium. At the end of this month, you (owner of a U.S. firm) are meeting with a Japanese firm to   which you will try to sell supplies. If you receive an order from that firm, you will obtain a forward contract to hedge the future receivables in yen. As of this morning, the forward rate of the yen and spot rate are the same. You believe that interest rate parity holds. 

This afternoon, news occurs that makes you believe that the U.S. interest rates will increase substantially by the end of this month, and that the Japanese interest rate will not change. However, your expectations of the spot rate of the Japanese yen are not affected at all in the future.  How will your expected dollar amount of receivables from the Japanese transaction be affected (if at all) by the news that occurred this afternoon? Explain.


2. Testing IRP. The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the U.S. is 6 percent. The spot rate of the Singapore dollar (S$) is $.50 and the forward rate of the S$ is $.46.  Assume zero transactions costs. 

	a.	   Does interest rate parity exist? 
b.	   Can a U.S. firm benefit from investing funds in Singapore using covered interest arbitrage? 



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