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In: Finance

You work on a FX trading desk. A client calls and asks you the deposit rate...

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%

Solutions

Expert Solution

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 = 4.2093/(1+interest rate in malaysia
1+interest rate in malaysia = 4.2093/4.1695
1+interest rate in malaysia = 1.009546
Interest rate in malaysia = 1.009546-1
Interest rate in malaysia = 0.009546 or 0.9546%
There may be Little difference due to decimal places.I have considered upto 4 decimal places.
The deposit rate in malaysia we can gurantee is 0.9546%
Please upvotethe answer
If you have any doubt,please ask in the comments

jeff jeffy answered 4 months ago
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