Exam 7: International Arbitrage and Interest Rate Parity

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

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 ____.

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

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 is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?

Assume the following information: Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.

Which of the following is not true regarding interest rate parity (IRP)?

Assume the following information: Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy?

Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____.

Which of the following is not mentioned in the text as a form of international arbitrage?

Assume the following information: From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.

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

When using ____, funds are typically tied up for a significant period of time.

Points below the IRP line represent situations where:

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

Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage.

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 the act of this covered interest arbitrage?

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?

Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?

If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then:

Locational arbitrage explains why prices among banks at different locations will not normally differ by a significant amount.