Timothy and his wife are considering the purchase of a new car. In addition to the price, they are also considering the cost of
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Answer:
<u>discount</u>, <u>the size of the discount increased </u>
Explanation:
As per the interest rate parity theory (IRPT) , the difference between forward and spot rate of a currency is equal to the difference between their respective interest rates.
Forward rate for SGD i.e Singapore dollar means the US Dollars which can be purchased by 1 SGD i.e US Dollars per SGD.
Also, the currency whose interest rate is higher would be at a forward discount whereas the currency with lower interest rate would be at a forward premium. This effect mitigates the possibility of any arbitrage gain.
= Interest rate in USA
= Interest rate in Singapore
As per the given information, FR = SR × = Spot Rate × 0.99
when interest rate in Singapore rises and falls in USA.. Let's assume, new interest rates being 3% in USA and 6% in Singapore.
Forward Rate would be, Spot Rate × = Spot rate × 0.972
Thus, it can be seen that SGD was at a forward discount at the beginning and with increase in it's interest rates and reduction in US Dollar interest rates, SGD forward discount increased.