(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.) (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.
(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.) (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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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FIN301 Copyright © 2020 Singapore University of Social Sciences (SUSS) Page 5 of 5
Timed Online Assignment – July Semester 2020
(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.)
(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.
Transcribed Image Text: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:
Bid
1.4135
Ask
1.4140
Spot SGD/USD
6 month forward SGD/USD
1.4105
1.4110
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