. Speculation. Diamond Bank expects that the Singapore dollar will depreciate ag

Question

. 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?

Explanation / Answer

Borrowed 10 mS$ @24%.
Converted into $ @ 0.43 $/S$ = 10*0.43 = 4.3 m$
This is deposited for 60 days @ 7% rate i.e. 0.07 in decimals.
FV on maturity = 4.3(1+0.07*60/365) = 4.349479 m$
Converted into S$ @ 0.42 $/S$ = 4.349479 /0.42 = 10.3559 m S$
Profit = 10.3559 - 10 = 0.3559 mS$ (ANSWER)

Had S$ put in deposit for 60 days,
its FV would have been = 10(1+0.22*60/365) = 10.3616 mS$

So, the 2nd strategy of depositing S$ would have been more profitable.

Hence, the present strategy of the bank is not to be pursued. (ANSWER)

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