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Interest rates in Sri Lanka are 6.25% p.a and in Singapore, they are currently at...

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Finance

Interest rates in Sri Lanka are 6.25% p.a and in Singapore, they are currently at 1.25% p.a. The SGD/LKR spot rate is 13.48. (a) Calculate the theoretical two-year forward rate of the SGD implied by Interest Rate Parity. (b) Now assume the actual two-year forward rate is SGD/LKR 11.50. What, if any, is the percentage return from engaging in Covered Interest Arbitrage? (Calculate as a percentage of your initial borrowing, accurate to 4 decimal places, making sure to include any opportunity cost in your calculations)

Kindly show all workings.

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