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1st Question: Answer

The document contains two questions. For the first question, borrowing Singapore dollars and investing in US dollars results in a loss, so the strategy should not be pursued. For the second question, borrowing British pounds and investing in US dollars results in a profit, so the strategy should be pursued.

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Cedrich Zakhariah
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78 views

1st Question: Answer

The document contains two questions. For the first question, borrowing Singapore dollars and investing in US dollars results in a loss, so the strategy should not be pursued. For the second question, borrowing British pounds and investing in US dollars results in a profit, so the strategy should be pursued.

Uploaded by

Cedrich Zakhariah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1st Question

Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot rate of $0.43 to $0.42 in 60 days.
exist: The following interbank lending and borrowing rates

Currency Lending rate Borrowing rate

USD 7% 7.2%
SGD 22% 24%

Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in U.S. dollars
for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?

Answer
1) Borrow SGD 10,000,000 Exchange at USD $0,43/SGD 4,300,000 USD
7%/(60/360) = 7%/6 1.17%
2) Lends at 7% for 60 days
4,300,000 USD x (1+1,17%) = 50,310 4,350,310 USD
3) Received 4,350,310 USD Exchange at SGD $0,42/SGD SGD 10,357,881
24%(60/360) = 24%/6 4%
4) Borrow at 24% for 60 days
SGD 10,000,000 x (1+4%) = 400,000 SGD 10,400,000
Invest - Loan
5) Profit/Loss SGD -42,119
SGD 10,357,881 - SGD 10,400,000

Suggestion: Diamond Bank shouldn't pursue this strategy because it results in a loss of SGD -42,119
2nd Question
Kurnick Co. expects that the pound will depreciate from $1.70 to $1.68 in one year. It has no money to invest, but it could borrow
money to invest. A bank allows it to borrow either 1 million dollars or 1 million pounds for one year. It can borrow dollars at 6 percent
or British pounds at 5 percent for one year. It can invest in a risk-free dollar deposit at 5 percent for one year or a risk-free British deposit
at 4 percent for one year. Determine the expected profit or loss (in dollars) if Kurnick Co.
pursues a strategy to capitalize on the expected depreciation of the pound.

Answer
1) Borrow 1,000,000 Pounds Exchange at $1,70 / Pounds 1,700,000 USD
2) Lends at 5% a year 1,700,000 USD x (1+5%) = 85,000 USD 1,785,000 USD
3) Received 1,785,000 USD Exchange at $1,68 / Pounds 1,062,500 Pounds
4) Borrow at 5% a year 1,000,000 Pounds x (1+5%) = 50,000 Pounds 1,050,000 Pounds
Invest - Loan
5) Profit/Loss 12,500 Pounds
1,062,500 Pounds - 1,050,000 Pounds

Suggestion: Kurnick Co. should pursue this strategy because it results a profit of 12,500 Pounds

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