Question

1. You work on a FX trading desk. A client calls and asks you the deposit rate you can guarantee them in the Malaysian Ringgit (MYR) currency for one year. You have the below information. What deposit rate can you offer the client as a guarantee you can secure them? Your main funding currency is USD. Answer in percentage points to the fourth decimal (e.g. 2.5000% is 2.5000).

USD/MYR Spot:    4.1090

USD/MYR 1-yr Forward FX: 4.1695

USD 1yr Interest Rate: 2.4400%

2. You are analyzing the returns of an investment fund over the last 2 years. Returns and inflation during that time are listed below in the table. What was the real return during year 1? Answer in percentage points to the nearest 4th decimal.

  Return   Inflation

Year 1 7.20% 3.90%

Year 2 2.10%. 4.20%

Answer 1

1)

As per Interest rate Parity

Forward price

=

Spot price*[(1+interest rate in US(home))/(1+interest rate in Malaysia(away))

here'

Spot

=

4.1090 USD/MYR

Forward price

=

4.1695 USD/MYR

Interest rate (US)

=

2.44% or 0.244

Therefore

4.1695

=

4.1090*[(1+0.0244)/(1+int rate in malaysia)

4.1695

=

4.1090*(1.0244)/(1+int rate in malaysia)

4.1695

=

4.20926/(1+interest rate in malaysia

1+interest rate in malaysia

=

4.20926/4.1695

1+interest rate in malaysia

=

1.009535916

Interest rate in malaysia

=

1.009536-1

Interest rate in malaysia

=

0.009536 or 0.9536%

The deposit rate in malaysia we can gurantee is 0.9536%

2)

nominal return (yr1)

=

7.2% or 0.072

Inflation (yr 1)

=

3.9% or 0.039

Real rate of return (year 1)

=

[(1+nominal rate)/(1+inflation)]-1

=

[(1+0.072)/(1+0.039)]-1

=

(1.072/1.039)-1

=

0.031761

or 3.1761%

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