Question 1

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 2

Assume the following bid and ask rates of the pound for two banks as shown below: ​
Bid
Ask
Bank C
$1)61
$1)63
Bank D
$1)58
$1)60
​
As locational arbitrage occurs:

Accepted Answer

A)  the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase. 
B)  the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease. 
C)  the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease. 
D)  the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 these are correct.

Question 5

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

Accepted Answer

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

Question 6

Assume the following information:​ Exchange rate of Japanese yen in U.S.$
=
$)011
Exchange rate of euro in U.S.$
=
$1)40
Exchange rate of euro in Japanese yen
=
140 yen
​
What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

Accepted Answer

A)  ​$100,000 
B)  ​-$90,909 
C)  ​10 percent 
D)  ​-9.09 percent

Question 7

Assume the following information: Spot rate today of Swiss franc
=
$)60
1-year forward rate as of today for Swiss franc
=
$)63
Expected spot rate 1 year from now
=
$)64
Rate on 1-year deposits denominated in Swiss francs
=
7%
Rate on 1-year deposits denominated in U.S. dollars
=
9%
​
From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent.

Accepted Answer

A)  5.00 
B)  12.35 
C)  15.50 
D)  14.13 
E)  11.22

Question 8

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

Accepted Answer

A)  ​premium; increase 
B)  ​discount; decrease 
C)  ​discount; increase 
D)  ​premium; decrease

Question 9

In which case will locational arbitrage most likely be feasible?​

Accepted Answer

A)  ​One bank's ask price for a currency is greater than another bank's bid price for the currency. 
B)  ​One bank's bid price for a currency is greater than another bank's ask price for the currency. 
C)  ​One bank's ask price for a currency is less than another bank's ask price for the currency. 
D)  ​One bank's bid price for a currency is less than another bank's bid price for the currency.

Question 10

Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate and ____ pressure on the pound's forward rate.​

Accepted Answer

A)  ​downward; downward 
B)  ​downward; upward 
C)  ​upward; downward 
D)  ​upward; upward

Question 11

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

Accepted Answer

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

Question 12

Assume the following information: U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks
=
12%
1-year deposit rate offered on Swiss francs
=
10%
1-year forward rate of Swiss francs
=
$)62
Spot rate of Swiss franc
=
$)60
​
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.

Question 13

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 14

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

Question 15

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.

Question 16

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

Question 17

Triangular arbitrage involves 3 transactions that must be executed at a single bank.

Accepted Answer

A) True 
 B)False

Question 18

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)  2.00 
B)  2.40 
C)  .80 
D)  .50 
E)  None of these are correct.
Answer Key

Question 19

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?​

Accepted Answer

A)  ​$2,041,667 
B)  ​$9,804 
C)  ​$500 
D)  ​$1,639

Question 20

​Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. 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)  ​$7,067 
B)  ​$8,556 
C)  ​$10,114 
D)  ​$12,238

Exam 7: International Arbitrage and Interest Rate Parity

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.

Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1) 61 $1) 63 Bank D $1) 58 $1) 60 As locational arbitrage occurs:

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

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

Assume the following information: Exchange rate of Japanese yen in U.S.$ = $) 011 Exchange rate of euro in U.S.$ = $1) 40 Exchange rate of euro in Japanese yen = 140 yen What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

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

In which case will locational arbitrage most likely be feasible?

Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts pressure on the pound's spot rate and pressure on the pound's forward rate.

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

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $) 62 Spot rate of Swiss franc = $) 60 Given this information:

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

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

According to interest rate parity (IRP) :

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.

Triangular arbitrage involves 3 transactions that must be executed at a single bank.

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?

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR) . Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?

Exam 7: International Arbitrage and Interest Rate Parity

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.

Assume the following bid and ask rates of the pound for two banks as shown below: ​ Bid Ask Bank C $1) 61 $1) 63 Bank D $1) 58 $1) 60 ​ As locational arbitrage occurs:

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

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

Assume the following information:​ Exchange rate of Japanese yen in U.S.$ = $) 011 Exchange rate of euro in U.S.$ = $1) 40 Exchange rate of euro in Japanese yen = 140 yen ​ What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

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

In which case will locational arbitrage most likely be feasible?​

Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate and ____ pressure on the pound's forward rate.​

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

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $) 62 Spot rate of Swiss franc = $) 60 ​ Given this information:

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

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

According to interest rate parity (IRP) :​

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.

Triangular arbitrage involves 3 transactions that must be executed at a single bank.

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?

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR) . Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?​

Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1) 61 $1) 63 Bank D $1) 58 $1) 60 As locational arbitrage occurs:

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

Assume the following information: Exchange rate of Japanese yen in U.S.$ = $) 011 Exchange rate of euro in U.S.$ = $1) 40 Exchange rate of euro in Japanese yen = 140 yen What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

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

In which case will locational arbitrage most likely be feasible?

Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts pressure on the pound's spot rate and pressure on the pound's forward rate.

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $) 62 Spot rate of Swiss franc = $) 60 Given this information:

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

According to interest rate parity (IRP) :

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR) . Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?