Mark’s firm has built up a reserve of SGD 100 million over the years – a percentage from after tax profits. He is keen to use this fund to scan the global FX environment and make prudent and riskless investments that can return a positive profit in less than 12 months. He has received the following information: - Japanese Yen Money Market Interest Rate = 2 % per annum (or 1% for 180 days) USD Money Market Interest Rate = 4 % per annum (or 2% for 180 days) S1 =Spot=SGD1.35=1USD S2 =Spot=Yen106=1USD F1801 = Forward rate 180 days down the road = SGD 1.34 = 1 USD F1802 = Forward rate 180 days down the road = Yen 104 = 1 USD Clearly show your calculations and assumptions for the following: -

1) Assume Mark is willing to invest SGD 100 million for 180 days. What should he do to take advantage of the information?

2) What is his profit (or loss) in USD?

3) What is his profit (or loss) in SGD?

4) Mark had funds of SGD 100 million to play with. Assume he does not want to use these funds and is willing to borrow USD in the international market. If he borrows USD 100 million – how would your answer to Q (2) and (3) change

First let us calculate his profit if he invests in USD money market

spot rate of SGD 1.35= 1 USD

SGD 100,000,000 at the spot rate= 100,000,000/1.35= USD 74,074,074.07  

Interest earned for 6 months at 2% for 180 days= 74,074,074 *.02= 1,481,481.481

Total amount= USD 75,555,555.56

Value of USD 75,555,555.56 at forward rate 180 days SGD 1.34= 1 USD

= SGD 101,244,444.50

Hence profit= 101,244,444.50 -100,000,000= SGD 1,244,444.50

Now we will calculate the profit if invested in Japanese market

Value at spot rate of SGD 100,000,000= USD 74,074,074.07 = 74,074,074.07 *106= ¥ 7,851,851,851

Interest at 1 % for 180 days= 7,851,851,851*.01= 78,518,518

Total amount= ¥ 7,930,370,369

Forward rate 180 days is Yen 104= 1USD

Value of ¥ 7,930,370,369 after conversion to USD= 76,253,561

Value of USD 76,253,561 at forward rate of SGD 1.34= 1 USD

= 102,179,772.1

Profit in SGD= 102,179,772.1- 100,000,000= 2,179,772

Hence converting SGD to Yen is more profitable. By doing so the firm will earn a profit of 2,179,772 in SGD and a profit in USD= 2179772/1.34= 1,626,695.522 Answer

If the firm borrows USD 100 million at 2% for 180 days, he has to repay = USD 102,000,000

on conversion of USD 100 million to Yen at spot rate , he gets 10,600 million Yen

Interest at 1% for 180 days= 106 million Yen

Total amount= 10,600+ 106= 10,706 million Yen

on conversion at forward rate of Yen 104=1USD, he gets= 102,942,307.70 USD

Hence, his profit= 102,942,307.70-102,000,000= USD 942,307.70

Profit in SGD= 1,262,692.32 Answer