Question

Assume that interest rate parity exists and will continue to exist. The U.S. interest rate was 4% while the Singapore interest rate was 5% at the beginning of the month. Assume the Singapore interest rate rises while the U.S. interest rate declines over the month. Based on this information, the forward rate of the Singapore dollar exhibited a______ at the beginning of the month, and _______by the end of the month. a. premium; the size of the premium increased b. premium; changed to a discount c. discount; discount changed to a premium

Answer 1

Based on this information, the forward rate of the Singapore dollar exhibited a discount at the beginning of the month, and discount changed to a premium by the end of the month.

Step-by-step explanation:

Interest is understood as the “premium” paid to the lender for not having used these resources for a period of time that the borrower could use. Interest is the remuneration paid for the capital that is borrowed. The interest rate, in turn, is the relationship that exists between the interest received by the lender and how much of the resource was borrowed. Based on this, we can state that in a situation where the US interest rate was 4%, while Singapore's interest rate was 5% at the beginning of the month, while Singapore's interest rate increased while the US interest rate declines over the month, the Singapore dollar forward rate exhibited a discount at the beginning of the month, and the discount changed to a premium by the end of the month.