Exam 7: International Arbitrage and Interest Rate Parity

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 this covered interest arbitrage activity?

(Multiple Choice)

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Question 41

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 interest rate on U.S. dollars = 9% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____ percent.

(Multiple Choice)

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Question 42

Assume the following information: You have $400,000 to invest: Current spot rate of Sudanese dinar (SDD) = $)00570 90-day forward rate of the Sudanese dinar = $)00569 90-day interest rate in the United States = 4)0% 90-day interest rate in Sudan = 4)2% If you conduct covered interest arbitrage, what amount will you have after 90 days?

(Multiple Choice)

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Question 43

Points above the IRP line represent situations where:

(Multiple Choice)

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Question 44

The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent.

(True/False)

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Question 45

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

(Multiple Choice)

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Question 46

Which of the following is not true regarding interest rate parity (IRP)?

(Multiple Choice)

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Question 47

Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the United States and the foreign country.

(True/False)

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Question 48

For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective.

(True/False)

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Question 49

The yield curve of every country has its own unique shape.

(True/False)

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Question 50

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, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

(Multiple Choice)

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Question 51

Which of the following is an example of triangular arbitrage initiation?

(Multiple Choice)

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Question 52

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 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 53

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 United States = 3% 3-month deposit rate in Great Britain = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

(Multiple Choice)

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Question 54

Arbitrage involves capitalizing on a discrepancy in quoted prices in an attempt to make a profit, but it entails substantial risk.

(True/False)

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Question 55

If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country.

(True/False)

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Question 56

Exhibit 7-1 Assume the following information: You have $300,000 to invest: The spot bid quote 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 is $1.10 The 180-day interest rate in the United States is 6% The 180-day interest rate in Europe is 8% -Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?

(Multiple Choice)

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Question 57

If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

(Multiple Choice)

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Question 58

When using ____, funds are typically tied up for a significant period of time.

(Multiple Choice)

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Question 59

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 British pound = $1)26 Spot rate of British pound = $1)30 Given this information:

(Multiple Choice)

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Question 60

Showing 41 - 60 of 90

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 this covered interest arbitrage activity?

Points above the IRP line represent situations where:

The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent.

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

Which of the following is not true regarding interest rate parity (IRP)?

Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the United States and the foreign country.

For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective.

The yield curve of every country has its own unique shape.

Which of the following is an example of triangular arbitrage initiation?

Arbitrage involves capitalizing on a discrepancy in quoted prices in an attempt to make a profit, but it entails substantial risk.

If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country.

If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

When using ____, funds are typically tied up for a significant period of time.

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 British pound = $1)26 Spot rate of British pound = $1)30 Given this information:

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 Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity?​

Points above the IRP line represent situations where:​

The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent.

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

Which of the following is not true regarding interest rate parity (IRP)?

Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the United States and the foreign country.

For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective.

The yield curve of every country has its own unique shape.

Which of the following is an example of triangular arbitrage initiation?​

Arbitrage involves capitalizing on a discrepancy in quoted prices in an attempt to make a profit, but it entails substantial risk.

If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country.

If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

When using ____, funds are typically tied up for a significant period of time.

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 British pound = $1)26 Spot rate of British pound = $1)30 ​ Given this information:

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

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 this covered interest arbitrage activity?

Points above the IRP line represent situations where:

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

Which of the following is an example of triangular arbitrage initiation?

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 British pound = $1)26 Spot rate of British pound = $1)30 Given this information: