Question 1

Assume the following information:
U.S.investors have $1,000,000 to invest
1-year deposit rate offered on U.S.dollars = 12%
1-year deposit rate offered on Singapore dollars = 10%
1-year forward rate of Singapore dollars = $.412
Spot rate of Singapore dollar = $.400
Given this information:

Accepted Answer

A)  interest rate parity exists and covered interest arbit rage 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 arbit rage by U.S. investors results in a yield above what is possible domesti cally. 
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 2

Assume the following information:
Current spot rate of Australian dollar = $.64
Forecasted spot rate of Australian dollar 1 year from now = $.59
1-year forward rate of Australian dollar = $.62
Annual interest rate for Australian dollar deposit = 9%
Annual interest rate in the U.S.= 6%
Given the information in this question,the return from covered interest arbitrage by U.S.investors with $500,000 to invest is _______%.

Accepted Answer

A)  about 6.00 
B)  about 9.00 
C)  about 7.33 
D)  about 8.14 
E)  about 5.59

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

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 arbit rage 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 arbit rage by U.S. investors results in a yield above what is possible domesti cally. 
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 7

Assume the following information:
Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One-year forward rate of the New Zealand dollar = $.42
Annual interest rate on New Zealand dollars = 8%
Annual interest rate on U.S.dollars = 9%
Given the information in this question,the return from covered interest arbitrage by U.S.investors with $500,000 to invest is _______%.

Accepted Answer

A)  about 11.97 
B)  about 9.63 
C)  about 11.12 
D)  about 11.64 
E)  about 10.63

Question 8

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 the above

Question 9

If the interest rate is lower in the U.S.than in the United Kingdom,and if the forward rate of the British pound is the same as its spot rate:

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 10

Which of the following is an example of triangular arbitrage initiation

Accepted Answer

A)  buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask. 
B)  buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20. 
C)  buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20. 
D)  converting funds to a foreign currency and investing the funds overseas.

Question 11

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 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 12

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

Accepted Answer

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

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)  $11,764. 
B)  $11,964. 
C)  $36,585. 
D)  $24,390. 
E)  $18,219.

Question 15

Due to _______,market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S.dollar.

Accepted Answer

A)  forward realignment arbitrage 
B)  triangular arbitrage 
C)  covered interest arbitrage 
D)  locational arbitrage

Question 16

Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S.$ = $.60
Exchange rate of pound in U.S.$ = $1.50
Exchange rate of pound in Singapore dollars = S$2.6
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 17

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

Accepted Answer

A)  spot rate of peso increases;forward rate of peso decreases. 
B)  spot rate of peso decreases;forward rate of peso increases. 
C)  spot rate of peso decreases;forward rate of peso decreases. 
D)  spot rate of peso increases;forward rate of peso increases.

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)  2.0. 
B)  2.40. 
C)  .80. 
D)  .50. 
E)  none of the above

Exam 7: International Arbitrage and Interest Rate Parity

Assume the following information: U.S.investors have $1,000,000 to invest 1-year deposit rate offered on U.S.dollars = 12% 1-year deposit rate offered on Singapore dollars = 10% 1-year forward rate of Singapore dollars = $.412 Spot rate of Singapore dollar = $.400 Given this information:

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

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.

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

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:

If the interest rate is lower in the U.S.than in the United Kingdom,and if the forward rate of the British pound is the same as its spot rate:

Which of the following is an example of triangular arbitrage initiation

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

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

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.

Due to _______,market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S.dollar.

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

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