Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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 D

Question 3

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

Accepted Answer

A)  Covered interest arbitrage is a reason for observing interest rate parity (IRP). 
B)  If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country. 
C)  When interest rate parity holds, covered interest arbitrage is not possible. 
D)  When interest rate disparity exists, covered interest arbitrage may not be profitable. 
E)  All of the above are true. 
A)  Covered interest arbitrage is a reason for observing interest rate parity (IRP). 
B)  If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country. 
C)  When interest rate parity holds, covered interest arbitrage is not possible. 
D)  When interest rate disparity exists, covered interest arbitrage may not be profitable. 
E)  All of the above are true. E

Question 4

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 5

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 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

Assume the following information: U.S. investors have $1,000,000 to invest:
  Given this information:

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 11

Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the pound should exhibit a premium of about 1%.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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 15

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

Accepted Answer

A) True 
 B)False

Question 16

Assume the following information: U.S. investors have $1,000,000 to invest:
  Given this information:

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 17

Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% 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 18

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 19

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 20

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

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

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?

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

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:

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

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

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.

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?

Assume the following information: U.S. investors have $1,000,000 to invest: Given this information:

Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the pound should exhibit a premium of about 1%.

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

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.

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

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

Assume the following information: U.S. investors have $1,000,000 to invest: Given this information:

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

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

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

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

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Exam 7: International Arbitrage and Interest Rate Parity

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

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?

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

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:

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

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

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.

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?

Assume the following information: U.S. investors have $1,000,000 to invest: Given this information:

Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the pound should exhibit a premium of about 1%.

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

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.

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

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

Assume the following information: U.S. investors have $1,000,000 to invest: Given this information:

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

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

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

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