Question

Suppose that the following quotes on Singaporean Dollars (SGD) and Hong Kong Dollars (HKD) are available from your bank SGD1.87/USD and HKD7.75/USD, and that the AUD is quoted by another bank at HKD5.81/SGD. Which of the following statements is correct?

a)The implied cross rate is HKD4.14/SGD and the SGD is undervalued relative to HKD
b)The implied cross rate is HKD14.5/SGD and the HKD is overvalued relative to SGD
c)The implied cross rate is HKD14.5/SGD and the SGD is overvalued relative to HKD
d)The implied cross rate is HKD4.14/SGD and the HKD is undervalued relative to SGD

Answer 1

The implied cross rate is HKD4.14/SGD, calculated by using the given forex rates SGD1.87/USD and HKD7.75/USD. This shows that the SGD is undervalued relative to HKD when compared to the bank's quote of HKD5.81/SGD.

Step-by-step explanation:

To determine the correct statement, we need to calculate the implied cross rate between Singaporean Dollars (SGD) and Hong Kong Dollars (HKD) using the provided quotes. We have SGD1.87/USD and HKD7.75/USD, and another quote of AUD at HKD5.81/SGD.

First, let's calculate how many SGD you can get for one HKD:
1 USD = SGD1.87
1 USD = HKD7.75
Therefore: HKD7.75 = SGD1.87
So, for one HKD, you get SGD1.87 / HKD7.75 = SGD0.2413.

The bank's quote of AUD at HKD5.81/SGD is our next reference. To see the implied cross-rate, we compare with our calculation:
HKD5.81 / SGD1 (bank's quote)
HKD1 / SGD0.2413 (our calculation)
So, if we take the reciprocal of our calculation, we get:
SGD1 / HKD0.2413 = SGD4.14/HKD
This implies that compared to the bank's quote of HKD5.81/SGD, the SGD is undervalued relative to HKD.

Therefore, the correct statement is: The implied cross rate is HKD4.14/SGD and the SGD is undervalued relative to HKD.