Question Details

Can a U.S. firm benefit from investing funds 



1. 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? 
2.	Testing PPP. Inflation differentials between the U.S. and other industrialized countries have typically been a few percentage points in any given year. Yet, in many years annual exchange rates between the corresponding currencies have changed by 10 percent or more. What does this information suggest about PPP?



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