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.
a. forward realignment arbitrage
b. triangul
C
Due to ____, market forces should realign the spot rate of a currency among banks.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage
D
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.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest a
B
If interest rate parity exists, then ____ is not feasible.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage
C
In which case will locational arbitrage most likely be feasible?
a. One bank's ask price for a currency is greater than another bank's bid price for the currency
b. One bank's bid price for a currency is greater than another bank's ask price for the curre
B
When using ____, funds are not tied up for any length of time.
a. covered interest arbitrage
b. locational arbitrage
c. triangular arbitrage
d. B and C
D
When using ____, funds are typically tied up for a significant period of time.
a. covered interest arbitrage
b. locational arbitrage
c. triangular arbitrage
d. B and C
A
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:
a. should exhibit a discount.
b. should exhibit a premium.
c. sh
A
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.
B
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
A
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?
a. downward pressure on the euro's spot rate.
b
B
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?
a. upward pressure on the Swiss franc's spot rate.
b. upwar
D
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
A
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
A
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
a. larger will be the forward discount of the foreign currency.
b. larger will be the forward premium of the foreign currency.
c.
A
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 a 9
A
Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:
a. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.
b. U.S. in
D
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 dolla
B
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% Annual
E
20. Assume the following bid and ask rates of the pound for two banks as shown below:
Bid
Bank A $1.41 Bank B $1.39
Ask
$1.42 $1.40
As locational arbitrage occurs:
a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will
D
21. 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
D
Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:
a. larger will be the forward discount of the foreign currency.
b. larger will be the forward premium of the foreign currency.
c.
B
23. 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 e
A
24. 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 d
B
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
D
26. 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?
a. 2.0.
b. 2.40.
c. .80.
d. .50.
e. none of the above
D
27. 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
E
28. 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:
a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as if
they investe
B
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.
a. downward; downward
b.
C
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
D
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
A
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
A
33. 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
Gi
B
34. 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% An
E
35. 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:
a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will
D
36. 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
D
37. Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S. $ = $.60
Exchange rate of pound in U.S. $ = $1.50
Exchange rate of pound in Singapore dollars = S$2.6
Based on the information given,
B
38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locat
D
39. Which of the following is an example of triangular arbitrage initiation?
a. buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask.
b. buying Singapore dollars from a bank (quoted at $.55) tha
C
40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.57
A
National Bank quotes the following for the British pound and the New Zealand dollar:
Quoted Bid Price / Quoted Ask Price
Value of a British pound (�) in $ $1.61 $1.62
Value of a New Zealand dollar (NZ$) in $ $.55 $.56
Value of a British pound in
New Zeala
C
42. Assume the following information:
You have $900,000 to invest:
Current spot rate of Australian dollar (A$) = $.62
180-day forward rate of the Australian dollar = $.64
180-day interest rate in the U.S. = 3.5%
180-day interest rate in Australia = 3.0%
I
A
Assume the following information:
You have $400,000 to invest:
Current spot rate of Sudanese dinar (SDD) = $.00570
90-day forward rate of the dinar = $.00569
90-day interest rate in the U.S. = 4.0%
90-day interest rate in Sudan = 4.2%
If you conduct cover
D
Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid rate for the euro (�) is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro
A
45. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180
days? Is covered interest arbitrage feasible in this situation?
a. 7.96%; feasible
b. 6.04%; feasible
c. 6.04%; not feasible
d. 4.07%; not feasib
B
46. According to interest rate parity (IRP):
a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.
b. the future spot rate differs from the current spot rate by a sufficient amou
D
47. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%.
Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward
____ will ____.
a. premium; increas
C
62. Assume the following information:
U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks = 10%
1-year deposit rate offered on British pounds = 13.5%
1-year forward rate of Swiss francs = $1.26
Spot rate of Swiss franc = $1
A
63. If quoted exchange rates are the same across different locations, then ____ is not feasible.
a. triangular arbitrage
b. covered interest arbitrage
c. locational arbitrage
d. A and C
D
64. Points above the IRP line represent situations where:
a. covered interest arbitrage is feasible from the perspective of domestic investors and results
in the same yield as investing domestically.
b. covered interest arbitrage is feasible from the pers
C
65. Points below the IRP line represent situations where:
a. covered interest arbitrage is feasible from the perspective of domestic investors and results
in the same yield as investing domestically.
b. covered interest arbitrage is feasible from the pers
B
66. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?
a. transaction costs.
b. political risk.
c. differential tax laws.
d. all of the above.
D
67. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.
a. discount; 2.73
b. premium; 2.73
c. discount; 3.65
d. premium; 3.65
B
68. Assume the following information:
Exchange rate of Japanese yen in U.S. $ = $.011
Exchange rate of euro in U.S. $ = $1.40
Exchange rate of euro in Japanese yen = 140 yen
What will be the yield for an investor who has $1,000,000 available to conduct tr
C
69. Assume the following information:
Value of an Australian dollar (A$) in $ $0.67 $0.69
Value of Mexican peso in $ $.074 $.077
Value of an Australian dollar in Mexican pesos 8.2 8.5
Assume you have $100,000 to conduct triangular arbitrage. What will be
B
88. Which of the following is not mentioned in the text as a form of international arbitrage?
a. Locational arbitrage
b. Triangular arbitrage
c. Transactional arbitrage
d. Covered interest arbitrage
e. All of the above are mentioned in the text as forms o
C
89. Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct
D
90. American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National
Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:
a. buying rupees from American Bank at the bid ra
B
91. Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, the following adjustments must take place.
a. One bank's ask price will rise and the oth
D
92. Which of the following is an example of triangular arbitrage initiation?
a. Buying a currency at one bank's ask and selling at another bank's bid, which is higher than
the former bank's ask.
b. Buying Singapore dollars from a bank (quoted at $0.55) th
C
93. Hewitt Bank quotes a value for the Japanese yen (�) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is �118.00. You have $5,000 to conduct triangular arbitrage. How much
B
94. National Bank quotes the following for the British pound and the New Zealand dollar:
Quoted Bid Price/ Quoted Ask Price
Value of a British pound (�) in $ $1.61 $1.62
Value of a New Zealand dollar (NZ$) in $ $0.55 $0.56
Value of a British pound in New
C
95. Which of the following is not true regarding covered interest arbitrage?
a. Covered interest arbitrage tends to force a relationship between the interest rates of two
countries and their forward exchange rate premium or discount.
b. Covered interest a
C
96. Which of the following is not true regarding covered interest arbitrage?
a. Covered interest arbitrage is a reason for observing interest rate parity (IRP).
b. If the forward rate is equal to the spot rate, conducting covered interest arbitrage will y
E
97. Which of the following is not true regarding interest rate parity (IRP)?
a. When interest rate parity holds, covered interest arbitrage is not possible.
b. When the interest rate in the foreign country is higher than that in the home country, the
forw
D