TB7 - Chapter 7 International Arbitrage and Interest Rate...

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Chapter 7 International Arbitrage and Interest Rate Parity 1. 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 ANSWER: C 2. 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 ANSWER: D 3. 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 U.S. dollar. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage ANSWER: B 4. If interest rate parity exists, then _______ is not feasible. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage ANSWER: C 5. In which case will locational arbitrage most likely be feasible? A) One bank’s ask price for a currency is greater than another bank’s bid price for the currency. B) One bank’s bid price for a currency is greater than another bank’s ask price for the currency. C) One bank’s ask price for a currency is less than another bank’s ask price for the currency. D) One bank’s bid price for a currency is less than another bank’s bid price for the currency. ANSWER: B 203
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204 International Financial Management 6. When using _______, funds are not tied up for any length of time. A) covered interest arbitrage B) locational arbitrage C) triangular arbitrage D) locational arbitrage or triangular arbitrage ANSWER: D 7. When using _______, funds are typically tied up for a significant period of time. A) covered interest arbitrage B) locational arbitrage C) triangular arbitrage D) locational arbitrage or triangular arbitrage ANSWER: A 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: A) should exhibit a discount. B) should exhibit a premium. C) should be zero (i.e., it should equal its spot rate). D) should exhibit a premium or should be zero. ANSWER: A 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: A) U.S. investors could possibly benefit from covered interest arbitrage. B) British investors could possibly benefit from covered interest arbitrage. C) neither U.S. nor British investors could benefit from covered interest arbitrage.
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This note was uploaded on 01/25/2012 for the course ECON 102 taught by Professor Jones during the Spring '11 term at UVA.

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TB7 - Chapter 7 International Arbitrage and Interest Rate...

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