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Practice Problems Set 2

# Practice Problems Set 2 - 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. ____ 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 ____ 2. If interest rate parity exists, then _______ is not feasible. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage ____ 3. In which case will locational arbitrage most likely be feasible? ____ 4. When using _______, funds are typically tied up for a significant period of time. ____ 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: ____ 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 ____ 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? ____
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