International Financial Management
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Testing IRP:
The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the U.S. is 6 percent. The spot rate of the Singapore dollar (S$) is $.50 and the forward rate of the S$ is $.46. Assume zero transactions costs.
a. Does interest rate parity exist?
b. Can a U.S. firm benefit from investing funds in Singapore using covered interest arbitrage?
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a. Does interest rate parity exist?
F1/e0=(1+rd)/(1+rf)
(1+rd)/(1+rf)=(1+6%)/(1+11%)=0.9550
F1/e0=0.46/0.50=0.92
Since the two values are not same, the IRP does not ...
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