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Exam 7: International Arbitrage and Interest Rate Parity

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Question 21

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Assume the bid rate of a Swiss franc is £0.42 while the ask rate is £0.45 at Bank X. Assume the bid rate of the Swiss franc is £0.40 while the ask rate is £0.41 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?

A) £24,340
B) £125,000
C) £150,000
D) £12,550

E) C) and D)
F) B) and C)

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Question 22

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

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

F) B) and D)
G) None of the above

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Question 23

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

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

Based on interest rate parity, the larger the degree by which the UK interest rate exceeds the foreign interest rate, the:

In which case will locational arbitrage most likely be feasible?

Assume the bid rate of a New Zealand dollar is £0.183 while the ask rate is £0.185 at Bank X. Assume the bid rate of the New Zealand dollar is £0.179 while the ask rate is £0.182 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?

To capitalize on high foreign interest rates using covered interest arbitrage, a UK investor would convert pounds to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

Bank A quotes a bid rate of £0.125 and an ask rate of £0.155 for the Malaysian ringgit (MYR) . Bank B quotes a bid rate of £0.162 and an ask rate of £0.171 for the ringgit. What will be the profit for an investor who has £500,000 available to conduct locational arbitrage?

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.

Assume the US dollar is worth £0.82, and the Canadian dollar is worth £0.61. What is the value of the Canadian dollar in US dollars to the nearest cent?

Due to ____, market forces should realign the spot rate of a currency among banks.

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

Assume the following information: ​ Current spot rate of Australian dollar = £0.40 Forecasted spot rate of Australian dollar 1 year from now = £0.37 1-year forward rate of Australian dollar = £0.38 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the UK = 6% ​ Given the information in this question, the return from covered interest arbitrage by UK investors is ______%.

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 US dollar.

Assume that British interest rates are higher than US 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.

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the UK interest rate, the:

Assume that the UK 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?

When using ____, funds are not tied up for any length of time.

Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.