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Quoted Bid Price
Quoted Ask Price
Value of a British pound (£) in $
$1.61
$1.62
Value of a New Zealand dollar (NZ$) in $
$.55
$.56
Value of a British pound in
New Zealand dollars
NZ$2.95
NZ$2.96
Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?
a.
$77.64
b.
$197.53
c.
$15.43
d.
$111.80
69. Assume that interest rate parity holds, and the euro’s interest rate is 9 percent while the U.S. interest rate is 12 percent.
Then the euro’s interest rate increases to 11 percent while the U.S. interest rate remains the same. As a result of the
increase in the interest rate on euros, the euro’s forward ____ will ____ in order to maintain interest rate parity.
a.
discount; increase
b.
discount; decrease
c.
premium; increase
d.
premium; decrease
70. Which of the following is not mentioned in the text as a form of international arbitrage?
a.
Locational arbitrage
b.
Triangular arbitrage
c.
Transactional arbitrage
d.
Covered interest arbitrage
e.
All of these are mentioned in the text as forms of international arbitrage.
71. Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and
the forward premium (or discount) on the forward exchange rate between the two currencies.
a.
forward realignment arbitrage
b.
triangular arbitrage
c.
covered interest arbitrage
d.
locational arbitrage
72. Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S.$
=
$.60
Exchange rate of pound in U.S.$
=
$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?
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
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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.
73. Assume the following information:
You have $900,000 to invest:
Current spot rate of Australian dollar (A$)
=
$.62
180-day forward rate of the Australian dollar
=
$.64
180-day interest rate in the United States
=
3.5%
180-day interest rate in Australia
=
3.0%
If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?
a.
$56,903
b.
$61,548
c.
$27,000
d.
$31,500
74. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian
dollars (A$). 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?
a.
A$39.93
b.
A$25,043.48
c.
A$553.00
d.
None of these are correct.
75. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:
a.
larger will be the forward discount of the foreign currency.
b.
larger will be the forward premium of the foreign currency.
c.
smaller will be the forward premium of the foreign currency.
d.
smaller will be the forward discount of the foreign currency.
76. Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in U.S.$
=
$.32
Exchange rate of pound in U.S.$
=
$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?
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.
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77. 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:
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.
78. If interest rate parity exists, then ____ is not feasible.
a.
forward realignment arbitrage
b.
triangular arbitrage
c.
covered interest arbitrage
d.
locational arbitrage
79. Due to ____, market forces should realign the spot rate of a currency among banks.
a.
forward realignment arbitrage
b.
triangular arbitrage
c.
covered interest arbitrage
d.
locational arbitrage
80. According to interest rate parity (IRP):
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.
81. 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.
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a.
5.00
b.
12.35
c.
15.50
d.
14.13
e.
11.22
82. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?
a.
transaction costs
b.
political risk
c.
differential tax laws
d.
All of these are correct.
83. 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:
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.
84. Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent.
The forward rate on British pounds exhibits a ____ of ____ percent.
a.
discount; 2.73
b.
premium; 2.73
c.
discount; 3.65
d.
premium; 3.65
85. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
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.
86. Assume the U.S. interest rate is 2 percentage points higher than the Swiss rate, and the forward rate of the Swiss franc
has a 4 percent premium. Given this information:
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
United States.
c.
Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in
Switzerland AND U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if
they invested in the United States.
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d.
None of these are correct.
87. Assume the following bid and ask rates of the pound for two banks as shown below:
Bid
Ask
Bank A
$1.41
$1.42
Bank B
$1.39
$1.40
As locational arbitrage occurs:
a.
the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.
b.
the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.
c.
the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.
d.
the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.
88. If quoted exchange rates are the same across different locations, then ____ is not feasible.
a.
triangular arbitrage
b.
covered interest arbitrage
c.
locational arbitrage
d.
triangular arbitrage AND locational arbitrage
89. Assume the following information:
Exchange rate of Japanese yen in U.S.$
=
$.011
Exchange rate of euro in U.S.$
=
$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?
a.
$100,000
b.
−$90,909
c.
10 percent
d.
−9.09 percent
90. Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian dollar (C$) of $0.821.
The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular
arbitrage. How much will you end up with if you conduct triangular arbitrage?
a.
$6,053.27
b.
$5,030.45
c.
$6,090.13
d.
Triangular arbitrage is not possible in this case.
91. Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at
14 percent. 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?
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.
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92. 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?
a.
2.00
b.
2.40
c.
.80
d.
.50
e.
None of these are correct.
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Answer Key
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26. True
27. True
28. True
29. True
30. True
31. False
32. False
33. a
34. d
35. d
36. c
37. d
38. a
39. d
40. e
41. b
42. d
43. e
44. a
45. d
46. d
47. b
48. a
49. b
50. e
51. b
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