Exam 7: International Arbitrage and Interest Rate Parity

Assume the following information: You have $400,000 to invest: If you conduct covered interest arbitrage, what amount will you have after 90 days?

The foreign exchange market is an over-the-counter market.

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.

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

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

In which case will locational arbitrage most likely be feasible?

Assume the following information: What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

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

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

The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro's forward rate should exhibit a premium of about 3%.

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

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?

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

Assume the following information for a bank quoting on spot exchange rates: Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

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?

The interest rate on yen is 7%. The interest rate in the U.S. is 9%. The yen's forward rate should exhibit a premium of about 2%.

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

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 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.