Question 1

For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) covered interest arbitrage 
B) locational arbitrage 
C) triangular arbitrage 
D) B and C 
A) covered interest arbitrage 
B) locational arbitrage 
C) triangular arbitrage 
D) B and C

Question 3

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?​

Accepted Answer

A) downward pressure on the euro's spot rate 
B) downward pressure on the euro's forward rate 
C) downward pressure on the U.S. interest rate 
D) upward pressure on the euro's interest rate 
A) downward pressure on the euro's spot rate 
B) downward pressure on the euro's forward rate 
C) downward pressure on the U.S. interest rate 
D) upward pressure on the euro's interest rate

Question 4

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​

Accepted Answer

A) True 
 B)False

Question 5

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?​

Accepted Answer

A) $2,041,667 
B) $9,804 
C) $500 
D) $1,639 
A) $2,041,667 
B) $9,804 
C) $500 
D) $1,639

Question 6

Assume the following information:
You have $900,000 to invest:
​
If you conduct covered interest arbitrage, what is the dollar profit you will have realized aFter 180 days?
Current spot rate of Australian dollar (A$)=$.62
180-day forward rate of the Australian dollar=$.64
180-day interest rate in the United States=3.5%
180-day interest rate in Australia=3.0%

Accepted Answer

A) $56,903 
B) $61,548 
C) $27,000 
D) $31,500 
A) $56,903 
B) $61,548 
C) $27,000 
D) $31,500

Question 7

Locational arbitrage explains why spot exchange rates among banks at different locations normally will not differ by a significant amount

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) larger will be the forward discount of the foreign currency. 
B) larger will be the forward premium of the foreign currency. 
C) smaller will be the forward premium of the foreign currency. 
D) smaller will be the forward discount of the foreign currency. 
A) larger will be the forward discount of the foreign currency. 
B) larger will be the forward premium of the foreign currency. 
C) smaller will be the forward premium of the foreign currency. 
D) smaller will be the forward discount of the foreign currency.

Question 9

Assume the following bid and ask rates of the pound for two banks as shown below:
As locational arbitrage occurs:
​

Accepted Answer

A) the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase. 
B) the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease. 
C) the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease. 
D) the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase. 
A) the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase. 
B) the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease. 
C) the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease. 
D) the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

Question 10

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 ____.

Accepted Answer

A) appreciate; depreciate 
B) depreciate; appreciate 
C) depreciate; depreciate 
D) appreciate; appreciate 
E) remain stable; appreciate 
A) appreciate; depreciate 
B) depreciate; appreciate 
C) depreciate; depreciate 
D) appreciate; appreciate 
E) remain stable; appreciate

Question 11

Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts​

Accepted Answer

A) True 
 B)False

Question 12

Points below the IRP line represent situations where:​

Accepted Answer

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 perspective of domestic investors and results in a yield above what is possible domestically. 
C) covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. 
D) covered interest arbitrage is feasible for neither domestic nor foreign investors. 
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 perspective of domestic investors and results in a yield above what is possible domestically. 
C) covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. 
D) covered interest arbitrage is feasible for neither domestic nor foreign investors.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations

Accepted Answer

A) True 
 B)False

Question 15

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?​

Accepted Answer

A) $15,385 
B) $15,625 
C) $22,136 
D) $31,250 
A) $15,385 
B) $15,625 
C) $22,136 
D) $31,250

Question 16

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?

Accepted Answer

A) $7,067 
B) $8,556 
C) $10,114 
D) $12,238 
A) $7,067 
B) $8,556 
C) $10,114 
D) $12,238

Question 17

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

Accepted Answer

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 currency. 
C) One bank's ask price for a currency is less than another bank's ask price for the currency. 
D) One bank's bid price for a currency is less than another bank's bid price for the currency. 
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 currency. 
C) One bank's ask price for a currency is less than another bank's ask price for the currency. 
D) One bank's bid price for a currency is less than another bank's bid price for the currency.

Question 18

Assume that interest rate parity holds, and the euro's interest rate is 9 percent while the U.S. interest rate is 12 percent. Then the euro's interest rate increases to 11 percent while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity.

Accepted Answer

A) discount; increase 
B) discount; decrease 
C) premium; increase 
D) premium; decrease 
A) discount; increase 
B) discount; decrease 
C) premium; increase 
D) premium; decrease

Question 19

Assume the following bid and ask rates of the pound for two banks as shown below:
​
As locational arbitrage occurs:
​
Bid
Ask
Bank A
$1)41
$1)42
Bank B
$1)39
$1)40

Accepted Answer

A) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. 
B) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease. 
C) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. 
D) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase. 
A) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. 
B) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease. 
C) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. 
D) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

Question 20

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​

Accepted Answer

A) True 
 B)False

For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency

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

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 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

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?

Locational arbitrage explains why spot exchange rates among banks at different locations normally will not differ by a significant amount

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

Assume the following bid and ask rates of the pound for two banks as shown below: As locational arbitrage occurs:

Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts

Points below the IRP line represent situations where:

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

Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations

In which case will locational arbitrage most likely be feasible?

Assume the following bid and ask rates of the pound for two banks as shown below: As locational arbitrage occurs: Bid Ask Bank A $1)41 $1)42 Bank B $1)39 $1)40

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

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

For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency

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

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 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​

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?​

Locational arbitrage explains why spot exchange rates among banks at different locations normally will not differ by a significant amount

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

Assume the following bid and ask rates of the pound for two banks as shown below: As locational arbitrage occurs: ​

Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts​

Points below the IRP line represent situations where:​

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

Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations

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

Assume the following bid and ask rates of the pound for two banks as shown below: ​ As locational arbitrage occurs: ​ Bid Ask Bank A $1)41 $1)42 Bank B $1)39 $1)40

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​

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

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

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 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

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?

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

Assume the following bid and ask rates of the pound for two banks as shown below: As locational arbitrage occurs:

Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts

Points below the IRP line represent situations where:

In which case will locational arbitrage most likely be feasible?

Assume the following bid and ask rates of the pound for two banks as shown below: As locational arbitrage occurs: Bid Ask Bank A $1)41 $1)42 Bank B $1)39 $1)40

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