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Question 1
Free
Multiple Choice

An arbitrage is best defined as

Choose correct answer/s
A

A legal condition imposed by the CFTC.

B

The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits.

C

The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits.

D

None of the above

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Question 2
Free
Multiple Choice

Interest Rate Parity (IRP)is best defined as

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A

When a government brings its domestic interest rate in line with other major financial markets.

B

When the central bank of a country brings its domestic interest rate in line with its major trading partners.

C

An arbitrage condition that must hold when international financial markets are in equilibrium.

D

None of the above

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Question 3
Free
Multiple Choice

When Interest Rate Parity (IRP)does not hold

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A

there is usually a high degree of inflation in at least one country.

B

the financial markets are in equilibrium.

C

there are opportunities for covered interest arbitrage.

D

both b) and c)

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Question 4
Free
Multiple Choice

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

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A

€1.5291/$

B

$1.5291/€

C

€1.4714/$

D

$1.4714/€

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Question 5
Free
Multiple Choice

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 3% APR in the U.S.and 5% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Choose correct answer/s
A

€1.5291/$

B

$1.5291/€

C

€1.4714/$

D

$1.4714/€

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Question 6
Multiple Choice

Suppose you observe a spot exchange rate of $2.00/£.If interest rates are 5% APR in the U.S.and 2% APR in the U.K.,what is the no-arbitrage 1-year forward rate?

Choose correct answer/s
A
£2.0588/$
B
$2.0588/£
C
£1.9429/$
D
$1.9429/£
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Question 7
Multiple Choice

A formal statement of IRP is

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A
image
B
image
C
image
D
image
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Question 8
Multiple Choice

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must one-year interest rate be in the euro zone to avoid arbitrage?

Choose correct answer/s
A
5.0%
B
6.09%
C
8.62%
D
None of the above
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Question 9
Multiple Choice

Suppose that the one-year interest rate is 3.0 percent in the Italy,the spot exchange rate is $1.20/€,and the one-year forward exchange rate is $1.18/€.What must one-year interest rate be in the United States?

Choose correct answer/s
A
1.2833%
B
1.0128%
C
4.75%
D
None of the above
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Question 10
Multiple Choice

Suppose that the one-year interest rate is 4.0 percent in the Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must one-year interest rate be in the United States?

Choose correct answer/s
A
2%
B
2.7%
C
5.32%
D
None of the above
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Question 11
Multiple Choice

Covered Interest Arbitrage (CIA)activities will result in

Choose correct answer/s
A
an unstable international financial markets.
B
restoring equilibrium quite quickly.
C
a disintermediation.
D
no effect on the market.
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Question 12
Multiple Choice

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate,is $1.16/€.Assume that an arbitrageur can borrow up to $1,000,000.

Choose correct answer/s
A
This is an example where interest rate parity holds.
B
This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C
This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D
None of the above
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Question 13
Multiple Choice

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate by the way)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.The interest rate in Japan (on an investment of comparable risk)is 13 percent.What is your strategy?

Choose correct answer/s
A
Take $1m, invest in U.S.T-bills.
B
Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.
C
Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.
D
Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.
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Question 14
Multiple Choice

Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany,and that the spot exchange rate is $1.60/€ and the forward exchange rate,with one-year maturity,is $1.58/€.Assume that an arbitrager can borrow up to $1,000,000 or €625,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

Choose correct answer/s
A
$238.65
B
$14,000
C
$46,207
D
$7,000
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Question 15
Multiple Choice

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain profit via covered interest arbitrage.

Choose correct answer/s
A
Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600.
B
Borrow €800,000 at i = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400.
C
Borrow €800,000 at i = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000.
D
Both c) and b)
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Question 16
Multiple Choice

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/€ and the forward exchange rate,with one-year maturity,is $1.16/€.Assume that an arbitrager can borrow up to $1,000,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

Choose correct answer/s
A
$10,690
B
$15,000
C
$46,207
D
$21,964.29
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Question 17
Multiple Choice

A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain dollar profit via covered interest arbitrage.

Choose correct answer/s
A
Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600.
B
Borrow €800,000 at i = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400.
C
Borrow €800,000 at i = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000.
D
Both c) and b)
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Question 18
Multiple Choice

An Italian currency dealer has good credit and can borrow €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain euro-denominated profit via covered interest arbitrage.

Choose correct answer/s
A
Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600.
B
Borrow €800,000 at i = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400.
C
Borrow €800,000 at i = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000.
D
Both c) and b)
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Question 19
Multiple Choice

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate by the way)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.What must the interest rate in Japan (on an investment of comparable risk)be before you are willing to consider investing there for six months?

Choose correct answer/s
A
11.991%
B
1.12%
C
7.45%
D
-7.45%
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Question 20
Multiple Choice

How high does the lending rate in the euro zone have to be before an arbitrageur would NOT consider borrowing dollars,trading for euro at the spot,investing in the euro zone and hedging with a short position in the forward contract? image

Choose correct answer/s
A
The bid-ask spreads are too wide for any profitable arbitrage when i > 0
B
3.48%
C
-2.09%
D
None of the above
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