Question 1

Points above 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 2

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?​

Accepted Answer

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

Question 3

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​

Accepted Answer

A) True 
 B)False

Question 4

The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

Accepted Answer

A) True 
 B)False

Question 5

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?​

Accepted Answer

A) $11,764. 
B) -$11,964. 
C) $36,585. 
D) $24,390. 
E) $18,219. 
A) $11,764. 
B) -$11,964. 
C) $36,585. 
D) $24,390. 
E) $18,219.

Question 6

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​

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

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

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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?​

Accepted Answer

A) $10,003 
B) $12,063 
C) $14,441 
D) $16,393 
E) $18,219 
A) $10,003 
B) $12,063 
C) $14,441 
D) $16,393 
E) $18,219

Question 10

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. 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 11

National Bank quotes the following for the British pound and the New Zealand dollar:​
Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?
​

Accepted Answer

A) $77.64 
B) $197.53 
C) $15.43 
D) $111.80 
A) $77.64 
B) $197.53 
C) $15.43 
D) $111.80

Question 12

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?

Accepted Answer

A) 7.96 percent; feasible 
B) 6.04 percent; feasible 
C) 6.04 percent; not feasible 
D) 4.07 percent; not feasible 
E) 10.00 percent; feasible 
A) 7.96 percent; feasible 
B) 6.04 percent; feasible 
C) 6.04 percent; not feasible 
D) 4.07 percent; not feasible 
E) 10.00 percent; feasible

Question 13

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​

Accepted Answer

A) True 
 B)False

Question 14

Interest rate parity suggests that an exchange rate should change over time based on the difference in interest rates between foreign versus domestic risk-free interest-bearing securities as of today.

Accepted Answer

A) True 
 B)False

Question 15

Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

Accepted Answer

A) Spot rate of peso increases; forward rate of peso decreases. 
B) Spot rate of peso decreases; forward rate of peso increases. 
C) Spot rate of peso decreases; forward rate of peso decreases. 
D) Spot rate of peso increases; forward rate of peso increases. 
A) Spot rate of peso increases; forward rate of peso decreases. 
B) Spot rate of peso decreases; forward rate of peso increases. 
C) Spot rate of peso decreases; forward rate of peso decreases. 
D) Spot rate of peso increases; forward rate of peso increases.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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​

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

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

Accepted Answer

A) Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. 
B) Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. 
C) Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. 
D) If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically. 
E) All of the above are true regarding covered interest arbitrage. 
A) Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. 
B) Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk. 
C) Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. 
D) If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically. 
E) All of the above are true regarding covered interest arbitrage.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

According to interest rate parity (IRP):​

Accepted Answer

A) the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies. 
B) the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies. 
C) the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. 
D) the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies. 
A) the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies. 
B) the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies. 
C) the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. 
D) the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

Points above the IRP line represent situations where:

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?

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

The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

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

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

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.

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

National Bank quotes the following for the British pound and the New Zealand dollar: Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

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

Interest rate parity suggests that an exchange rate should change over time based on the difference in interest rates between foreign versus domestic risk-free interest-bearing securities as of today.

Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

The yield curve of every country has its own unique shape

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

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

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

According to interest rate parity (IRP):

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

Points above the IRP line represent situations where:​

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?​

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​

The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

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​

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

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.

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

National Bank quotes the following for the British pound and the New Zealand dollar:​ Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? ​

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​

Interest rate parity suggests that an exchange rate should change over time based on the difference in interest rates between foreign versus domestic risk-free interest-bearing securities as of today.

Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

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

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​

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

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

According to interest rate parity (IRP):​

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

Points above the IRP line represent situations where:

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?

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

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

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

National Bank quotes the following for the British pound and the New Zealand dollar: Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

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

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

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

According to interest rate parity (IRP):