Exam 7: International Arbitrage and Interest Rate Parity

The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula.

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:

Forward rates are driven by the government rather than market forces.

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 $.576. How many Australian dollars should you expect to receive for your baht?

Assume that U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from this covered interest arbitrage activity?​

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 triangular arbitrage?

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 denominated in U.S. dollars = 9% ​ From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent.

Assume that interest rate parity holds. The Mexican interest rate is 50 percent, and the U.S. interest rate is 8 percent. Subsequently, the U.S. interest rate decreases to 7 percent. According to interest rate parity, the peso's forward ____ will ____.​

In which case will locational arbitrage most likely be feasible?​

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.​

When using ____, funds are not tied up for any length of time.

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 this information:

The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).

Due to ____, market forces should realign the spot rate of a currency among banks.​

According to interest rate parity (IRP):​

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.

Triangular arbitrage involves 3 transactions that must be executed at a single bank.

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?

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 locational arbitrage?​

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