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Unformatted text preview: 06 Student: ___________________________________________________________________________ 1. An arbitrage is best defined as: 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 2. Interest Rate Parity (IRP) is best defined as: 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 3. When Interest Rate Parity (IRP) does not hold 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. b and c 4. Suppose you observe a spot exchange rate of $1.50/ € . If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the noarbitrage 1year forward rate? A. € 1.5291/$ B. $1.5291/ € C. € 1.4714/$ D. $1.4714/ € 5. Suppose you observe a spot exchange rate of $1.50/ € . If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the noarbitrage 1year forward rate? A. € 1.5291/$ B. $1.5291/ € C. € 1.4714/$ D. $1.4714/ € 6. Suppose you observe a spot exchange rate of $2.00/ ≤ . If interest rates are 5% APR in the U.S. and 2% APR in the U.K., what is the noarbitrage 1year forward rate? A. ≤ 2.0588/$ B. $2.0588/ ≤ C. ≤ 1.9429 /$ D. $1.9429/ ≤ 7. A formal statement of IRP is A. B. C. D. Please note that your answers are worth zero points if they do not include currency symbols ($, € ) 8. If you borrowed € 1,000,000 for one year, how much money would you owe at maturity? 9. If you borrowed $1,000,000 for one year, how much money would you owe at maturity? 10. If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive? 11. If you had € 1,000,000 and traded it for USD at the spot rate, how many USD will you get? 12. USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i € = 4%. 13. USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed € 1m, traded for dollars at the spot rate and invested at i $ = 2%....
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This note was uploaded on 07/28/2011 for the course FIN 308 taught by Professor Canarella during the Summer '11 term at University of Nevada, Las Vegas.
 Summer '11
 CANARELLA
 Arbitrage

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