Question 1

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  False

Question 2

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. D

Question 3

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

Accepted Answer

A) True 
 B)False  False

Question 4

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 5

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

Question 6

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:

Accepted Answer

A)   U.S. investors could possibly benefit from covered interest arbitrage.
B)   British investors could possibly benefit from covered interest arbitrage.
C)   neither U.S. nor British investors could benefit from covered interest arbitrage.
D)   A and B

Question 7

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

As locational arbitrage occurs:

Accepted Answer

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

Question 8

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%.

Accepted Answer

A) True 
 B)False

Question 9

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

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 10

Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X.  Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 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)   $15,385.
B)   $15,625.
C)   $22,136.
D)   $31,250.

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)   B and C

Question 12

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

Question 13

Assume the following information:
You have $400,000 to invest
Current spot rate of Sudanese dinar (SDD) = $.00570
90-day forward rate of the dinar = $.00569
90-day interest rate in the U.S.= 4.0%
90-day interest rate in Sudan = 4.2%
If you conduct covered interest arbitrage,what amount will you have after 90 days

Accepted Answer

A)   $416,000.00.
B)   $416,800.00.
C)   $424,242.86.
D)   $416,068.77.
E)   none of the above

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

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

Accepted Answer

A)   larger will be the forward discount of the foreign currency.
B)   larger will be the forward premium of the foreign currency.
C)   smaller will be the forward premium of the foreign currency.
D)   smaller will be the forward discount of the foreign currency.

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

Question 17

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 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

Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S.$ = $.32
Exchange rate of pound in U.S.$ = $1.50
Exchange rate of pound in Singapore dollars = S$4.50
Based on the information given,as you and others perform triangular arbitrage,what should logically happen to the spot exchange rates

Accepted Answer

A)   The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
B)   The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
C)   The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
D)   The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 7: International Arbitrage and Interest Rate Parity

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.

According to interest rate parity (IRP) :

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

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.

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:

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

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 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

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

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:

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

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

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

In which case will locational arbitrage most likely be feasible

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

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