Practice Problems Set 2_SOLUTION

Practice Problems Set 2_SOLUTION - Moore School of Business...

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1 Moore School of Business Spring 2012 University of South Carolina IBUS 401 – INTERNATIONAL FINANCIAL MANAGEMENT PRACTICE PROBLEMS SET 2 CHAPTERS 7 AND 8 Identify the letter of the choice that best completes the statement or answers the question. __C__ 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 __C__ 2. If interest rate parity exists, then _______ is not feasible. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage __B__ 3. 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. __A__ 4. When using _______, funds are typically tied up for a significant period of time. a. covered interest arbitrage b. locational arbitrage c. triangular arbitrage d. B and C __A__ 5. 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. B or C. __B__ 6. 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. d. A and B.

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2 __B__ 7. 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? a. downward pressure on the euro's spot rate. b. downward pressure on the euro's forward rate. c. downward pressure on the U.S. interest rate. d. upward pressure on the euro's interest rate. __A__ 8. 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?
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Practice Problems Set 2_SOLUTION - Moore School of Business...

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