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    Speculation, Selling Currency

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    1. Speculation: Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist:
    Lending Rate Borrowing Rate
    U.S. dollar 7.0% 7.2%
    Singapore dollar 22.0% 24.0%

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

    2. Selling Currency: Brian Tull sold a put option on Canadian dollars for $.03 per unit. The strike price was $.75, and the spot rate at the time the option was exercised was $.72. Assume Brian immediately sold off the Canadian dollars received when the option was exercised. Also assume that there are 50,000 units in a Canadian dollar option. What was Brian's net profit on the put option?

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    Solution Preview

    1. Speculation: Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist:
    Lending Rate Borrowing Rate
    U.S. dollar 7.0% 7.2%
    Singapore dollar 22.0% 24.0%

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

    Currency Lending Rate Borrowing Rate
    U.S. Dollars (US$) 7.0% 7.2%
    Singapore dollar 22.0% 24.0%

    Singapore $ is depreciating by -2.38% =(0.42-0.43)/0.42

    However, the interest rate differential is more than 2.38%
    Thus forward ...

    Solution Summary

    Answers 2 questions on Speculation, Selling Currency.

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