Exam 7: International Arbitrage and Interest Rate Parity

Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent.

Free

(True/False)

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Question 1

Correct Answer:

Verified

False

Which of the following is not mentioned in the text as a form of international arbitrage?

Free

(Multiple Choice)

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Question 2

Correct Answer:

Verified

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

Free

(True/False)

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Question 3

Correct Answer:

Verified

False

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 execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

(Multiple Choice)

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Question 4

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 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

(Multiple Choice)

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Question 5

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 exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should .

(Multiple Choice)

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Question 6

Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.

(True/False)

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Question 7

Which of the following is not true regarding covered interest arbitrage?

(Multiple Choice)

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Question 8

If quoted exchange rates are the same across different locations, then ____ is not feasible.

(Multiple Choice)

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Question 9

Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate.

(True/False)

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Question 10

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:

(Multiple Choice)

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Question 11

Assume that the U.S. interest rate is 10 percent, while the British interest rate is 15 percent. If interest rate parity exists, then:

(Multiple Choice)

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Question 12

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 will you end up with if you conduct triangular arbitrage?

(Multiple Choice)

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Question 13

Which of the following is not true regarding covered interest arbitrage?

(Multiple Choice)

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Question 14

To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

(True/False)

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Question 15

The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent.

(True/False)

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Question 16

If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.

(True/False)

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Question 17

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

(True/False)

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Question 18

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?

(Multiple Choice)

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Question 19

Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a of percent.

(Multiple Choice)

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Question 20

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Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent.

Which of the following is not mentioned in the text as a form of international arbitrage?

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.

Which of the following is not true regarding covered interest arbitrage?

If quoted exchange rates are the same across different locations, then ____ is not feasible.

Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate.

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:

Assume that the U.S. interest rate is 10 percent, while the British interest rate is 15 percent. If interest rate parity exists, then:

Which of the following is not true regarding covered interest arbitrage?

To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent.

If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

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?

Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a of percent.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 7: International Arbitrage and Interest Rate Parity

Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent.

Which of the following is not mentioned in the text as a form of international arbitrage?

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.

Which of the following is not true regarding covered interest arbitrage?

If quoted exchange rates are the same across different locations, then ____ is not feasible.

Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate.

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:​

​Assume that the U.S. interest rate is 10 percent, while the British interest rate is 15 percent. If interest rate parity exists, then:

Which of the following is not true regarding covered interest arbitrage?

To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent.

If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

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?

Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a ____ of ____ percent.​

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Currency Derivatives

Government Influence on Exchange Rates

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:

Assume that the U.S. interest rate is 10 percent, while the British interest rate is 15 percent. If interest rate parity exists, then:

Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a of percent.