Question 1

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 2

Assume the following information for a bank quoting on spot exchange rates:  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 3

Assume the following information: You have $1,000,000 to invest:
 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)  $1,020,500. 
B)  $1,045,600. 
C)  $1,073,330. 
D)  $1,094,230. 
E)  $1,116,250.

Question 4

Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

Accepted Answer

A)  Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage. 
B)  Americans who invest in the U.S. earn the same rate of return as Germans who attempt covered interest arbitrage. 
C)  Americans who invest in the U.S. earn the same rate of return as Germans who invest in Germany 
D)  A and B 
E)  None of the above

Question 5

Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:

Accepted Answer

A)  Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland. 
B)  U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S. 
C)  A and B 
D)  none of the above

Question 6

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 7

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

Accepted Answer

A) True 
 B)False

Question 8

Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:

Accepted Answer

A)  British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S. 
B)  U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S. 
C)  U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S. 
D)  U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

Question 9

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 10

Points above 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 11

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

Question 12

Assume the following information: You have $900,000 to invest:
 If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?

Accepted Answer

A)  $56,903. 
B)  $61,548. 
C)  $27,000. 
D)  $31,500.

Question 13

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 14

National Bank quotes the following for the British pound and the New Zealand dollar:  Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

Accepted Answer

A)  $77.64 
B)  $197.53 
C)  $15.43 
D)  $111.80

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

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 17

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.

Question 18

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 19

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 amount will you have after 180 days?

Accepted Answer

A)  $318,109.10. 
B)  $330,000.00. 
C)  $312,218.20. 
D)  $323,888.90. 
E)  none of the above

Question 20

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 ____%.

Accepted Answer

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

Exam 7: International Arbitrage and Interest Rate Parity

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

Assume the following information for a bank quoting on spot exchange rates: Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

Assume the following information: You have $1,000,000 to invest: 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?

Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:

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.

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

Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:

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

Points above the IRP line represent situations where:

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?

Assume the following information: You have $900,000 to invest: If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?

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.

National Bank quotes the following for the British pound and the New Zealand dollar: Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

According to interest rate parity (IRP) :

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

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 ____%.