Note: Use of approximation for interest rate parity is OK. Assume the four-year annualized interest rate...
- Note: Use of approximation for interest rate parity is OK.
Assume the four-year annualized interest rate in the US is 9 percent and the four-year annualized interest rate in Singapore is 6 percent. Assume interest rate parity holds for a four-year horizon. Assume the spot rate of the Singapore dollar is $.60. If the forward rate is used to forecast exchange rates,
- What will be the forecast for the Singapore dollar’s spot rate in four years?
- Does this forecast imply expected appreciation or depreciation of the Singapore dollar?
Homework Answers
a. Singapore dollar's spot rate in four years =Spot Rate is
Singapore dollar *(1+Singapore Rate)^n/(1+US rate)^n
=0.60*(1+6%)^4/(1+9%)^4 =0.5366
b.Singapore dollar is appreciated over the four years.
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Note: Use of approximation for interest rate parity is
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