Question

"Diamond Bank expects that the Singapore dollar will depreciate against the U.S. dollar from its spot rate of $0.40 to $0.39 in 60 days. The following interbank lending and borrowing rates exist:Diamond Bank considers borrowing 11 million Singapore dollars in the interbank market and investing the funds in U.S. dollars for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?

Answer 1

Diamond Bank could potentially earn a profit of $110,000 by borrowing 11 million Singapore dollars and investing in U.S. dollars for 60 days, considering the expected depreciation of the Singapore dollar. However, the bank should also consider the interest rates of both currencies to determine the final profits.

Step-by-step explanation:

Diamond Bank plans to borrow 11 million Singapore dollars and invest the funds in U.S. dollars for 60 days. Based on the expected depreciation of the Singapore dollar from $0.40 to $0.39 against the U.S. dollar, Diamond Bank could potentially earn a profit from this strategy.

To estimate the profit, we can calculate the difference in exchange rates and the amount of money borrowed. The difference in exchange rates is $0.40 - $0.39 = $0.01. Multiplying this by the borrowed amount of 11 million Singapore dollars gives us a potential profit of $110,000.

However, it's important to consider the interest rates of both currencies. If the borrowing rate in Singapore is higher than the lending rate in the U.S., there may be additional costs that could reduce the overall profit. Diamond Bank should carefully analyze the interest rates and make an informed decision on whether to pursue this strategy.