Question 1

a) The following is the iphone 7 price list and the spot exchange rate for both countries.

Justify whether law of one price hold?

No, law of one price does not hold.

b) Refer to the above question, answer the question below:

Assuming now is 1 January

A Malaysian apple products reseller is due to pay US$12million on 1 March

March futures are trading at RM4.50 per dollar

Standard contract size is 100,000 USD

What is the result of a futures hedge if on 1 March the spot rate is RM4.80 per US$?
Risk is what u worry,

U pay to other ppl (apple reseller) USD 12 million

U pay usd 12 million, u pay now can use spot price 12mil, but is two months time

Worry usd appreciate, cuz u have to pay more, so they long usd.

We worry usd appreciate

Receive usd, worry usd depreciate alrd

Purchasing power and interest rate parity

Question 2

Assume that the spot exchange rate is S 0  = 24.94 yen per ringgit Malaysia and the expected
annual inflation rate for the Malaysia is 6.23%, and the annual expected Japanese inflation rate is
1.35%. Compute the exchange rate after 6 month. (MYR/JPY)

If compute the exchange rate after 1 year=23.79.

This two can accept.

Question 3

Explain the interest rate parity with appropriate example.

Under law of one price. SGD 106 x 2.9151 = 309. Interest rate differential. Net difference will be
adjusted 3% via forward rate. So forward rate make up the difference. After u calculate with
example, u can have concolusion, high interest rate will have a depreciated forward rate. Forward
rate was initially RM3, now is 2.9151. last time 3, now 2.9151. difference is adjustment of forward
rate. Not a prediction of future exchange rate. Merely adjustment of interest rate differentials.
exchange rate in future will be adjust based on changes in certain factor like demand and supply.
Law of one price only say yield is same if they have same risk. Shud be adjusted via interest rate.

Question 4

Today’s market price for 1 USD = 4.37 MYR

Given the following interest rates for the two currencies:

USD= 1% per annum

MYR= 3% per annum

a) Calculate the forward rate of USD/MYR

4.4565, if 1 pip diff then still deemed correct. Forward – spot = positive (premium)

b) Determine whether the swap point is at par, premium, or discount.

Premium

Question 5
a) Compute the 6-month forward bid rate

this one also can

USD/MYR , Currency must be quoted in pairs.

b) Explain the forward discount and forward premium with appropriate example.
When quoted currency has lower interest currency than base currency, will get a discount.
Now I want to buy crude palm oil, I cannot go bursa malaysia. Malaysia can only trade a few
derivative, like fbm klci, …
Exchange will have the list of approved brokers – smth like buy share from maybank, but
channel the order into one centralised market.
Question 6
a) Compute the bid rate of 6-month GBP/MYR.

b) Compute the offer rate of 3-month SGD/MYR.

c) Compute the bid rate of 9-month AUD/MYR.

d) Compute the offer rate of 6 month USD/MYR.

Ans no need put myr alrd, cuz alrd know quoted in ringgit.

Convergence property at the settlement, there is no time difference, spot=future.

Compare the brokers, which one is better.

When u short sell, sell the spot without forking out money to arbitrage

Lon