Question

Diamond Bank expects that the Singapore dollar will depreciote sgainst the U.S. doltar from its spot rate of 50.39 to 50.38 in 50 diay. The folloming interbank lending and boerowing rates exist Oiamond Bank considers borrowing 12 million Singapore dollars in the interbank market and investing the funds in U.5 dollan for 50 .days. Istimate the profits (or lossen) that could be earred from this strotegy-Should Diamond Bank pursue this strategy? Assume 360 doys in yeor far your caleulations. Da not rourid intermediate calculationi Round your answer to the nearest singaporo dollen Enter your anmer as a positive vaive. This strategy rewitsin a Therefore. biamond dank purwe this suategy

Answer 1

To determine if Diamond Bank should pursue the currency arbitrage strategy of borrowing SGD and investing in USD, we must calculate the interest earned on USD, the interest on SGD borrowed, and adjust for expected SGD depreciation.

Step-by-step explanation:

The student is asking about a currency arbitrage strategy where Diamond Bank considers borrowing Singapore dollars (SGD) and investing in U.S. dollars (USD) given an expected depreciation of the SGD against the USD. To estimate the profit or loss from this strategy, we need to calculate the interest earned on the USD investment and the interest paid on the SGD borrowed, as well as the loss from the expected depreciation of the SGD.

Let's assume the annual interbank borrowing rate for SGD is X% and for lending in USD is Y%. To find the daily rates, we would use X/360 for SGD and Y/360 for USD due to the 360-day banking year. The bank plans to borrow 12 million SGD and the expected exchange rate in 50 days moves from 50.39 to 50.38 per USD.

The profit or loss calculation would involve converting the 12 million SGD to USD at the initial exchange rate, investing at the USD rate for 50 days, converting back to SGD at the depreciated exchange rate, and subtracting the interest paid on the SGD borrowed. If the resulting amount is positive, it indicates profit, otherwise loss. Whether Diamond Bank should pursue this strategy depends on the relative interest rates, the extent of the expected depreciation, and the bank's risk tolerance.