Towson Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.80 to $.76 in 10 days. The following interbank lending and borrowing rates (annual rate) exist:
Lending Rate Borrowing Rate
U.S. dollar 6.0% 6.2%
Singaproe dollar 6.4% 6.7%
Assume that Towson Bank has a borrowing capacity of either $5 million or 6.25 million SGD in the interbank market, depending on which currency it wants to borrow.
a. How could Towson Bank attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.
b. Assume all the preceding information with this exception: Towson Bank expects the SGD to appreciate from its present spot rate of $.80 to $.83 in 30 days. How could it attempt to capitalize on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.