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Question 2 Star Industries Ltd would like to hedge its US$10 million payable to a US chip manufacturer, which is due in 90 days. Star approached various banks and obtained the following foreign exchange rate quotes as well as interest rates. SGD/USD spot rate SGD/USD forward rate Bid 0.7120 0.7150 Ask 0.7140 (Note: US$ per S$1) 0.7175 US$ 90-day interest rate S$ 90-day interest rate 0.75% 0.5% 0.80% 0.55% (a) If Star were to hedge forward its US$10m payable, analyse and compute the amount in Singapore dollars that the firm needs today. (5 marks) (b) Jack Tan, a recent SUSS finance graduate working in Star, suggested an alternative. Instead of doing a forward transaction, he suggested that the firm converts Singapore dollars into US dollars today and deposit the US dollars in a US dollar deposit account. Analyse and compute the amount of Singapo that the firm needs today if it follows Jack's suggestion. (5 marks) Assess which alternative is better for the firm. (4 marks) Examine and discuss whether there are any opportunities for arbitrage profits and their feasibility. (6 marks) Question 2 Star Industries Ltd would like to hedge its US$10 million payable to a US chip manufacturer, which is due in 90 days. Star approached various banks and obtained the following foreign exchange rate quotes as well as interest rates. SGD/USD spot rate SGD/USD forward rate Bid 0.7120 0.7150 Ask 0.7140 (Note: US$ per S$1) 0.7175 US$ 90-day interest rate S$ 90-day interest rate 0.75% 0.5% 0.80% 0.55% (a) If Star were to hedge forward its US$10m payable, analyse and compute the amount in Singapore dollars that the firm needs today. (5 marks) (b) Jack Tan, a recent SUSS finance graduate working in Star, suggested an alternative. Instead of doing a forward transaction, he suggested that the firm converts Singapore dollars into US dollars today and deposit the US dollars in a US dollar deposit account. Analyse and compute the amount of Singapo that the firm needs today if it follows Jack's suggestion. (5 marks) Assess which alternative is better for the firm. (4 marks) Examine and discuss whether there are any opportunities for arbitrage profits and their feasibility. (6 marks)

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