Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist: Lending Rate Borrowing Rate
U. S. dollar 7.0% 7.2%
Singapore dollar 22.0% 24.0%

Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in dollars for 60 days.

Required:
a. Estimate the profits (or losses) that could be earned from this strategy.
b. Should Diamond Bank pursue this strategy?

a) if you borrow 10 million Singapore dollars today and purchase $4,300,000. You then invest this money and earn $4,300,000 x 7% x 2/12 = $50,167 in interests. At the end of the 60 days you will have $4,350,167.

You can use the $4,350,167 to purchase 10,357,540 Singapore dollars.

At this moment, you will owe 10,000,000 x 24% x 2/12 = 400,000 in interests + 10,000,000 principal = 10,400,000 Singapore dollars

net loss = 10,357,540 - 10,400,000 = 42,460 Singapore dollars

b) No, they shouldn't since they will lose money. The problem with this operation is that the borrowing rate for Singapore dollars are too high (24%) vs a lending rate of 7% in US dollars.

answer; competency based pay;