Question

Assume the following information: U.S. investors have $1,000,000 to invest: 12% 10% 1-year deposit rate offered on U.S. dollars 1-year deposit rate offered on Singapore dollars 1-year forward rate of Singapore dollars Spot rate of Singapore dollar $.412 $.400 Given this information: O interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. O interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. O interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

Answer 1

It can be seen that there is 2% difference in deposit rates of United States and Singaporean dollar whereas there is 3% of difference in spot rates as well as future rates of Singapore dollars so there is interest rate disparity and and United States investors would be resulting in a yield below what is possible domestically.

All the other statement of false because interested parity is existing and there is a possibility of making Lower return because United States dollar has depreciated more than the interest rate.

Correct answer will be option (d)interest rate parity does not exist and covered interest arbitrage by United States investor will be resulting into a yield below what is possible domestically.