Scheduled maintenance: Saturday, December 10 from 10PM to 11PM PST
hello quizlet
Home
Subjects
Expert solutions
Create
Study sets, textbooks, questions
Log in
Sign up
Upgrade to remove ads
Only $35.99/year
CHapter7
Flashcards
Learn
Test
Match
Flashcards
Learn
Test
Match
Terms in this set (46)
1. Due to _______, market forces should realign the relation¬ship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
covered interest arbitage
due to _______, market forces should realign the spot rate of a currency among banks
locational arbitrage
due to_________, market forces should realign the cross exchange rate between two foreign curencies based on the spot exchange rates of the two currencies against the US dollar
triangular arbitrage
if interest rate parity exists, then _____ is not feasible
covered interest arbitrage
in which case will locational arbitrage most likely be feasible?
one banks bid price for a currency is greater than another banks ask price for the currency
when using _____, funds are not tied up for any length of time.
locational arbitrage or triangualr arbitrage
when using______, funds are typically tied up for a significant period of time
covered interest arbitrage
8. 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:
should exhibit a discount
9. 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:
british investors could possibly benefit from covered interest arbitrage
10. 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:
US investors could benefit from covered interest arbitrage
11. 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?
downward pressure on the euros forward rate
12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?
upward pressure on the swiss franc's forward rate
13. 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?
spot rate of peso increases, forward rate of peso decreases
14. 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 informa¬tion, 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?
$15.385
15. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
larger will be the forward discount of the foreign currency
Assume the following information:
You have $1,000,000 to invest
Current spot rate of pound = $1.30
90 day forward rate of pound = $1.28
3 month deposit rate in U.S. = 3%
3 month deposit rate in Great Britain = 4%
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?
$1,024,000
17. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:
U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.
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:
B) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
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 about _______%.
10.63
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:
the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.
21. 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 loca¬tional arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
$18,219
based on interest rate parity, the larger degree by which the US interest rate exceed sthe foreign interest rate, the:
larger will be the forward premium of the foreign curency
23. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should _______, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should _______.
appreciate, depreciate
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 _______%.
12.35
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?
the singapore dollar value in US dollars should appreciate , the pound value in US dollars should depreciate, and th epound value in singapore dollars should appreciate
26. 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?
.50
27. 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?
none of these
28. 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:
B) U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.
29. 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.
upward;downward
30. 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.
premium;decrease
31. 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 informa¬tion, 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?
7,067
Assume the following information:
You have $1,000,000 to invest
Current spot rate of pound = $1.60
90 day forward rate of pound = $1.57
3 month deposit rate in U.S. = 3%
3 month deposit rate in U.K. = 4%
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?
1,020,500
33. 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:
interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
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 about _______%.
5.59
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:
D) the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.
36. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute loca¬tional arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
16,393
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?
`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.
38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?
1,639
39. Which of the following is an example of triangular arbitrage initiation?
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 $.20.
40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). 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$39.93
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?
$15.43
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 U.S. = 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?
$56,903
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?
$416,068.77
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%
If you conduct covered interest arbitrage, what amount will you have after 180 days?
$318,109.10
46. According to interest rate parity (IRP):
the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.
47. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward _______ will _______.
discount; increase
Students also viewed
int fin ch 7
30 terms
Chapter 7 MCQ's
36 terms
Chapter 8
39 terms
Chapter 7 International Finance
44 terms
Other sets by this creator
chapter14
37 terms
chapter9
39 terms
chapter2full
31 terms
8full
29 terms
Verified questions
economics
What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?
algebra
Write the decimal as percent. $$ .25 = \underline{~~~~~~~~~~} $$
world geography
What are underwater sinkholes and underwater caves, and what is the difference?
economics
Suppose you observe the investment performance of 350 portfolio managers for five years and rank them by investment returns during each year. After five years, you find that 11 of the funds have investment returns that place the fund in the top half of the sample in each and every year of your sample. Such consistency of performance indicates to you that these must be the funds whose managers are in fact skilled, and you invest your money in these funds. Is your conclusion warranted?
Recommended textbook solutions
Century 21 Accounting: General Journal
11th Edition
Claudia Bienias Gilbertson, Debra Gentene, Mark W Lehman
1,012 solutions
Accounting: What the Numbers Mean
9th Edition
Daniel F Viele, David H Marshall, Wayne W McManus
345 solutions
Intermediate Accounting
14th Edition
Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
1,471 solutions
Fundamentals of Financial Management, Concise Edition
10th Edition
Eugene F. Brigham, Joel Houston
777 solutions
Other Quizlet sets
ANS: EXAM 1
83 terms
Dr.White Midterm Study Guide
85 terms
Chapter 9 Practice Questions
25 terms
BIO EXAM 4
42 terms