Question 1

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?​

Accepted Answer

A) transaction costs 
B) political risk 
C) differential tax laws 
D) all of the above 
A) transaction costs 
B) political risk 
C) differential tax laws 
D) all of the above D

Question 2

Assume the following information:
​
You have $1,000,000 to invest:
​
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?
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%

Accepted Answer

A) $1,024,000. 
B) $1,030,000. 
C) $1,040,000. 
D) $1,034,000. 
E) none of the above 
A) $1,024,000. 
B) $1,030,000. 
C) $1,040,000. 
D) $1,034,000. 
E) none of the above A

Question 3

If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

Accepted Answer

A) True 
 B)False

Question 6

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?​

Accepted Answer

A) $6,053.27 
B) $5,030.45 
C) $6,090.13 
D) Triangular arbitrage is not possible in this case. 
A) $6,053.27 
B) $5,030.45 
C) $6,090.13 
D) Triangular arbitrage is not possible in this case.

Question 7

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

Accepted Answer

A) forward realignment arbitrage 
B) triangular arbitrage 
C) covered interest arbitrage 
D) locational arbitrage 
A) forward realignment arbitrage 
B) triangular arbitrage 
C) covered interest arbitrage 
D) locational arbitrage

Question 8

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

Accepted Answer

A) British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States. 
B) U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States. 
C) U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States. 
D) U.S. investors will earn 10 percent whether they use covered interest arbitrage or invest in the United States. 
A) British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States. 
B) U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States. 
C) U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States. 
D) U.S. investors will earn 10 percent whether they use covered interest arbitrage or invest in the United States.

Question 9

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​

Accepted Answer

A) True 
 B)False

Question 10

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​.

Accepted Answer

A) True 
 B)False

Question 11

If interest rate parity exists, then ____ is not feasible.

Accepted Answer

A) forward realignment arbitrage 
B) triangular arbitrage 
C) covered interest arbitrage 
D) locational arbitrage 
A) forward realignment arbitrage 
B) triangular arbitrage 
C) covered interest arbitrage 
D) locational arbitrage

Question 12

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:​

Accepted Answer

A) buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate. 
B) buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. 
C) buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate. 
D) buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. 
E) Locational arbitrage is not possible in this case. 
A) buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate. 
B) buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate. 
C) buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate. 
D) buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate. 
E) Locational arbitrage is not possible in this case.

Question 13

The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent​

Accepted Answer

A) True 
 B)False

Question 14

Assume the following information:​
U.S. investors have $1,000,000 to invest:
Given this information:
1-year deposit rate offered by U.S. banks=12%
1-year deposit rate offered on Swiss francs=10%
1-year forward rate of Swiss francs=$.62
Spot rate of Swiss franc=$.60

Accepted Answer

A) interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. 
B) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. 
C) interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. 
D) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. 
A) interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. 
B) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. 
C) interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. 
D) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) forward realignment arbitrage 
B) triangular arbitrage 
C) covered interest arbitrage 
D) locational arbitrage 
A) forward realignment arbitrage 
B) triangular arbitrage 
C) covered interest arbitrage 
D) locational arbitrage

Question 18

Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

Accepted Answer

A) True 
 B)False

Question 19

Assume the following information:
​
Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent.
Current spot rate of Australian dollar=$.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 interest rate in the United States=6%

Accepted Answer

A) about 6.00 
B) about 9.00 
C) about 7.33 
D) about 8.14 
E) about 5.59 
A) about 6.00 
B) about 9.00 
C) about 7.33 
D) about 8.14 
E) about 5.59

Question 20

Assume the following information:​
You have $1,000,000 to invest:
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?
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%

Accepted Answer

A) $1,020,500 
B) $1,045,600 
C) $1,073,330 
D) $1,094,230 
E) $1,116,250 
A) $1,020,500 
B) $1,045,600 
C) $1,073,330 
D) $1,094,230 
E) $1,116,250

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.

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

Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

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

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

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

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 exists, then ____ is not feasible.

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:

The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent

Assume the following information: U.S. investors have $1,000,000 to invest: Given this information: 1-year deposit rate offered by U.S. banks=12% 1-year deposit rate offered on Swiss francs=10% 1-year forward rate of Swiss francs=$.62 Spot rate of Swiss franc=$.60

Forward rates are driven by the government rather than market forces

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

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 tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 7: International Arbitrage and Interest Rate Parity

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?​

If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.

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

Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

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

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

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​

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 exists, then ____ is not feasible.

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:​

The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent​

Assume the following information:​ U.S. investors have $1,000,000 to invest: Given this information: 1-year deposit rate offered by U.S. banks=12% 1-year deposit rate offered on Swiss francs=10% 1-year forward rate of Swiss francs=$.62 Spot rate of Swiss franc=$.60

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

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

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 tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

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

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.

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:

The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent

Assume the following information: U.S. investors have $1,000,000 to invest: Given this information: 1-year deposit rate offered by U.S. banks=12% 1-year deposit rate offered on Swiss francs=10% 1-year forward rate of Swiss francs=$.62 Spot rate of Swiss franc=$.60

Forward rates are driven by the government rather than market forces