Question

B) On 1 January 2015 an American investor bought USD1, 000,000 worth of Malaysian Ringgit and put it in a savings account for 1-year. The annual interest rate in Malaysian Ringgit was 5%. During that period, the interest rate in the US was 3.50%. On the purchase date the exchange rate was USD1 = MYR4.45.

i. One year after the start of the savings in Malaysia, the exchange rate was RM4.03 per US dollar. If the investor turned his savings back into dollars, what dollar rate of return did he earn? (10 Marks)

ii.What should be the exchange rate on 1 January 2015 for the investment in RM to be better than the investment in US dollars? (15 Marks)

Answer 1

On 1 January 2015 an American investor bought USD1, 000,000 worth of Malaysian Ringgit and put it in a savings account for 1-year is explained below with detailed explanation.

Step-by-step explanation:

i) Supposed rate using IRPT

FR = SR (1+ ih) / (1+ if) = 4.45 * 1.05 / 1.035 = RM4.5145/$

At this progressive rate investment in both currencies will implement the same rate of revenue. Above this valuation, $ investment is better and below this rate, RM investment is better.

ii) Investment in MR = 1000000 * 4.45 = 4450000

valuation after a year in MR = Deposit * ( 1+ r) = 4450000 * (1 + 0.05) = 4672500

Valuation in dollar after a year = 4672500 / 4.03 = 1159429.28

rate of revenue in dollar = Valuation after a year - Valuation at year 0 / Valueation at year 0 * 100

= 1159429.28 - 1000000 / 1000000 * 100 = 15.94%