Jack, a Singaporean business man, has to pay USD 780,000 to his trading partner from the US in 6 months' time. He obtained the following information from the bank:



Spot SGD/USD:   (Bid) 1.4135  (Ask)1.4140

6 month forward SGD/USD:   (Bid) 1.4105 (Ask)1.4110



(a) Suppose Jack can get a 2% interest rate for a 6 month USD deposit, solve for the interest rate for a 6 month SGD deposit so that Jack will be indifferent to exchanging the USD now or in 6 months' time. (Note: The 2% is not an annual rate but is applicable for the 6-month period.) (8 marks)



(b) Suppose Jack decides not to use the forward market to hedge the exchange rate risk but use the futures market instead. Explain one (1) advantage and one (1) disadvantage of using each method. (12 marks)

Answer rating: 100% (QA)

a To determine the interest rate for a 6month SGD deposit that would make Jack indifferent to exchanging USD now or in 6 months time we need to calcul... View the full answer