Libor + 4basis = 0.38% + 0.04% Questilon 3 You have SGD 5 million to invest for
ID: 2788619 • Letter: L
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Libor + 4basis = 0.38% + 0.04%
Questilon 3 You have SGD 5 million to invest for 3 months (91 days). Two choices are given to you: . aUSD 3-month commercial paper which can be hedged back into SGD by means Given that the current quotes are as follows: a SGD deposit of a covered interest arbitrage Instrument spot USDSGD 3-month swap 3-month SGD interest rate | 0.25%0.27% 3-month USD interest rate | 0.35%0.38% Quotes 1.4066/70 80/70 and that the yield of the commercial paper is USD LIBOR + 4 basis points. Calculate the difference in absolute returns from the two investment choices, assuming that the commercial paper may be bought and the covered interest arbitrage can be carried t with no restriotion on amounts. Note: SGD money market basis is ACT/365) (10 marks)Explanation / Answer
Option 1 - Invest in SGD @ 0.25% for 91 days 5000000 Interest earned - 5000000x0.25% x 91/365 3116.4384 5003116.4384 Return 3116.4384 Return in % 0.0623% Option 2 - Invest in USD CPs using CIA - Step 1 - Borrow SDG(as lower interest rate) - (we already have it ) 5000000 No outflow of SGD after 3m Step 2 - Convert SGD into USD Rate 1.4070 USD = 5000000/1.4070 3553660.27 Step 3 - Invest in Commercial papers Rate - 0.35% + 0.04 0.39% Amount 3553660.27 Interest for 91 days 3455.326109 Total inflow on 91st day 3557115.596 Step 4 - Sell the USD forward Rate = 1.4066 - 0.0080(High - low spread) 1.3986 SGD received from selling USD (1.3986 x 3557115.596) 4974981.873 Return -25018.12717 Return in % -0.5004% Difference between returns = 28134.5655 (3116.4384 -(-25018.12717)) Please provide feedback… Thanks in Advance.. :-)
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