Question 1

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%.

Accepted Answer

A) True 
 B)False

Question 2

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 3

The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

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

Question 8

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 9

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?

Accepted Answer

A)  7.96%; feasible 
B)  6.04%; feasible 
C)  6.04%; not feasible 
D)  4.07%; not feasible 
E)  10.00%; feasible

Question 10

Assume the following information:
You have $1,000,000 to invest:
$\begin{array} { l l l } 
\text { Current spot rate of pound } & = & \$ 1.30 \
90 \text { - tay forward rate of pound } & = & \$ 1.28 \
\text { 3-month deposit rate in U.S. } & = & 3 \% \
\text { 3-month deposit rate in Great Britain } & = & 4 \%
\end{array}$
If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

Accepted Answer

A)  $1,024,000. 
B)  $1,030,000. 
C)  $1,040,000. 
D)  $1,034,000. 
E)  none of the above

Question 11

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 12

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 13

Points below the IRP line represent situations where:

Accepted Answer

A)  covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically. 
B)  covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically. 
C)  covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets. 
D)  covered interest arbitrage is not feasible for neither domestic nor foreign investors.

Question 14

Assume the following information:
$\begin{array}{ll}
&\text { Quoted Bid Price } & \text {Quoted Ask Price }  \
\text {Value of an Australian dollar (AS) in $\$$ } & \text { \$ 0.67 }&\text { \$ 0.69 } \
\text {Value of Mexican peso in $\$$ } &\text { \$ .074 }&\text { \$ .077 }  \
\text {Value of an Australian dollar in } && \
\text {Mexican pesos } &\text {  8.2 }&\text {8.5 }  \
\end{array}$
Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy?

Accepted Answer

A)  $6,133 
B)  $2,368 
C)  $6,518 
D)  $13,711

Question 15

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 16

Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

Accepted Answer

A) True 
 B)False

Question 17

Assume the following information for a bank quoting on spot exchange rates:
$$\begin{array} { l l r } 
\text { Exchange rate of Singapore dollar in U.S. } \$ & = & \$ .32 \
\text { Exchange rate of pound in U.S. } \$ & = & \$ 1.50 \
\text { Exchange rate of pound in Singapore dollars } & = & \text { S } \$ 4.50
\end{array}$$
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.

Exam 7: International Arbitrage and Interest Rate Parity

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%.

The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

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%.

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.

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.

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

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:

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.

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

Points below the IRP line represent situations where:

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:

Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.