Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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 3

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

Accepted Answer

A)  buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask. 
B)  buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20. 
C)  buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20. 
D)  converting funds to a foreign currency and investing the funds overseas. 
A)  buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask. 
B)  buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20. 
C)  buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20. 
D)  converting funds to a foreign currency and investing the funds overseas. C

Question 4

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?

Accepted Answer

A)  2.0. 
B)  2.40. 
C)  .80. 
D)  .50. 
E)  none of the above 
A)  2.0. 
B)  2.40. 
C)  .80. 
D)  .50. 
E)  none of the above

Question 5

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 6

Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that 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 7

Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.

Accepted Answer

A)  discount; 2.73 
B)  premium; 2.73 
C)  discount; 3.65 
D)  premium; 3.65 
A)  discount; 2.73 
B)  premium; 2.73 
C)  discount; 3.65 
D)  premium; 3.65

Question 8

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?

Accepted Answer

A)  A$39.93. 
B)  A$25,043.48. 
C)  A$553.00. 
D)  none of the above 
A)  A$39.93. 
B)  A$25,043.48. 
C)  A$553.00. 
D)  none of the above

Question 9

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 10

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 11

Assume the following information:
$$\begin{array} { l l r } 
\text { Current spot rate of New Zealand dollar } & = & \$ .41 \
\text { Forecasted spot rate of New Zealand dollar 1 year from now } & = & \$ .43 \
\text { One-year forward rate of the New Zealand dollar } & = & \$ .42 \
\text { Annual interest rate on New Zealand dollars } & = & 8 \% \
\text { Annual interest rate on U.S. dollars } & = & 9 \%
\end{array}$$
Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.

Accepted Answer

A)  about 11.97 
B)  about 9.63 
C)  about 11.12 
D)  about 11.64 
E)  about 10.63 
A)  about 11.97 
B)  about 9.63 
C)  about 11.12 
D)  about 11.64 
E)  about 10.63

Question 12

National Bank quotes the following for the British pound and the New Zealand dollar:
$\begin{array}{ll}
&\text { Quoted Bid Price } & \text {Quoted Ask Price }  \
\text {Value of a British pound (£) in $\$$ } & \text { \$ 1.61 }&\text { \$1.62 } \
\text {Value of a New Zealand dollar (NZ\$) in $\$$ } &\text { \$ .55 }&\text { \$ 0.56 }  \
\text {Value of a British pound in } && \
\text {New Zealand dollars } &\text NZ\$2.95&\text NZ\$2.96  \
\end{array}$

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 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

Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid rate 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 U.S. is 6%
The 180-day interest rate in Europe is 8%
-Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days?

Accepted Answer

A)  $318,109.10. 
B)  $330,000.00. 
C)  $312,218.20. 
D)  $323,888.90. 
E)  none of the above 
A)  $318,109.10. 
B)  $330,000.00. 
C)  $312,218.20. 
D)  $323,888.90. 
E)  none of the above

Question 15

Assume the following information:
You have $900,000 to invest:
$$\begin{array}{l}
\text { You have } \$ 900,000 \text { to invest: }\
\begin{array} { l l l } 
\text { Current spot rate of Australian dollar (AS) } & = & \$ .62 \
\text { 180-day forward rate of the Australian dollar } & = & \$ .64 \
\text { 180-day interest rate in the U.S. } & = & 3.5 \% \
\text { 180-day interest rate in Australia } & = & 3.0 \%
\end{array}
\end{array}$$
If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?

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 16

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 17

National Bank quotes the following for the British pound and the New Zealand dollar:
$\begin{array}{lll} 
& \underline{\text { Quoted Bid Price}} & \underline{\text {Quoted Ask Price}} \
\text { Value of a British pound (£) in $\$$ } & \$ 1.61 & \$ 1.62 \
\text { Value of a New Zealand dollar (NZS) in $\$$ } & \$ .55 & \$ .56\
\text {Value of a British pound in} &  & \
\text { New Zealand dollars } & NZ\$2.95 & NZ\$ 2.96\
\end{array}$

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 18

Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

Accepted Answer

A)  should exhibit a discount. 
B)  should exhibit a premium. 
C)  should be zero (i.e., it should equal its spot rate). 
D)  B or C 
A)  should exhibit a discount. 
B)  should exhibit a premium. 
C)  should be zero (i.e., it should equal its spot rate). 
D)  B or C

Question 19

Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. 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 20

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

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

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

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

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?

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

Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?

Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a of percent.

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

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

Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. 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?

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

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

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

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

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?

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

Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?

Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.

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

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

Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. 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?

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

Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a of percent.