Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks.
locational arbitrage
Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.
triangular arbitrage
If interest rate parity exists, then ____ is not feasible.
covered interest arbitrage
In which case will locational arbitrage most likely be feasible?
One bank's bid price for a currency is greater than another bank's ask price for the currency.
When using ____, funds are not tied up for any length of time.
locational arbitrage
triangular arbitrage
When using ____, funds are typically tied up for a significant period of time.
locational arbitrage
triangular arbitrage
Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:
should exhibit a premium.
should be zero (i.e., it should equal its spot rate)
If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then:
a. U.S. investors could possibly benefit from covered interest arbitrage.
b. British investors could possibly benefit from covered interest arbitrage.
If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
a. U.S. investors could possibly benefit from covered interest arbitrage.
b. British investors could possibly benefit from covered interest arbitrage.
Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?
downward pressure on the euro's forward rate.
Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?
upward pressure on the Swiss franc's forward rate.
Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what
spot rate of peso increases; forward rate of peso decreases.
Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 a
$15,385.
(SOLUTION: $1,000,000/$.325 = NZ$3,076,923 * $.33 = $1,015,385. Thus, the profit is $15,385.)
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
larger will be the forward discount of the foreign currency.
Assume the following information:
You have $1,000,000 to invest:
Current spot rate of pound = $1.30
90-day forward rate of pound = $1.28
3-month deposit rate in U.S. = 3%
3-month deposit rate in Great Britain = 4%
If you use covered interest arbitrage for
$1,024,000.
(SOLUTION: $1,000,000/$1.30 = 769,231 pounds
(1.04) = 800,000 pounds
1.28 = $1,024,000)
Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:
U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.
Assume the following information:
U.S. investors have $1,000,000 to invest:
1-year deposit rate offered on U.S. dollars = 12%
1-year deposit rate offered on Singapore dollars = 10%
1-year forward rate of Singapore dollars = $.412
Spot rate of Singapore do
interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
SOLUTION: $1,000,000/$.400= S$2,500,000*(1.1)
= S$2,750,000*$.412 = $1,133,000
Yield = ($1,133,000-$1,000,000)/$1,0
Assume the following information:
Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One-year forward rate of the New Zealand dollar = $.42
Annual interest rate on New Zealand dollars = 8%
Annu
about 10.63
SOLUTION: $500,000/$.41 = NZ$1,219,512 * (1.08)
= NZ$1,317,073 * .42 = $553,171
Yield = ($553,171 -$500,000)/$500,000 = 10.63%
Assume the following bid and ask rates of the pound for two banks as shown below:
Bid Ask
Bank A $1.41 $1.42
Bank B $1.39 $1.40
As locational arbitrage occurs:
the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.
Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and exec
$24,390.
$1,000,000/$.41 = S2,439,024 * $.42 = $1,024,390
Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:
larger will be the forward premium of the foreign currency.
Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the excha
appreciate; depreciate
Assume the following information:
Spot rate today of Swiss franc = $.60
1-year forward rate as of today for Swiss franc = $.63
Expected spot rate 1 year from now = $.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denom
12.35
SOLUTION: $1,000,000/$.60= SF1,666,667 * (1.07)
= SF1,783,333 * $.63 = $1,123,500
Yield = ($1,123,500 - $1,000,000)/$1,000,000 = 12.35%
Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S. $ = $.32
Exchange rate of pound in U.S. $ = $1.50
Exchange rate of pound in Singapore dollars = S$4.50
Based on the information given, as
The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.
Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?
.50.
$.80/$1.60 = 0.50
Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?
a. Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage.
b. Americans who invest in the U.S. earn the same rate of return as Germans who attempt covered interest arbitrage.
c. Americans
Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:
U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.
Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate, and ____ pressure on the pound's forward rate.
upward; downward
Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate
premium; decrease
Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute lo
$7,067.
$1,000,000/$.566 = SF1,766,784 * $.57 = $1,007,067. Thus, the profit is $7,067.
Assume the following information:
You have $1,000,000 to invest:
Current spot rate of pound = $1.60
90-day forward rate of pound = $1.57
3-month deposit rate in U.S. = 3%
3-month deposit rate in U.K. = 4%
If you use covered interest arbitrage for a 90-day
$1,020,500.
$1,000,000/$1.60 = 625,000 pounds
(1.04) = 650,000 pounds
1.57 = $1,020,500
Assume the following information:
U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks = 12%
1-year deposit rate offered on Swiss francs = 10%
1-year forward rate of Swiss francs = $.62
Spot rate of Swiss franc = $.60
Given
interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
SOLUTION: $1,000,000/$.60 = SF1,666,667 * (1.1)
= SF1,833,333 * $.62 = $1,136,667
Yield = ($1,136,667 - $1,000,000)
Assume the following information:
Current spot rate of Australian dollar = $.64
Forecasted spot rate of Australian dollar 1 year from now = $.59
1-year forward rate of Australian dollar = $.62
Annual interest rate for Australian dollar deposit=9%
Annual i
about 5.59
SOLUTION: $500,000/$.64 = A$781,250 * (1.09)
= A$851,563 * $.62 = $527,969
Yield = ($527,969 - $500,000)/$500,000 = 5.59%
Assume the following bid and ask rates of the pound for two banks as shown below:
Bid Ask
Bank C $1.61 $1.63
Bank D $1.58 $1.60
As locational arbitrage occurs:
the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.
Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and
$16,393.
$1,000,000/$.61 = A$1,639,344 * $.62 = $1,016,393. Thus, the profit is $16,393.