A currency dealer has good credit and can borrow

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24) A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for oneyear. The one-year interest rate in the U.S. isi$= 2% and in the euro zone the one-year interestrate isi= 6%. The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate beto eliminate arbitrage opportunities?A) $1.2471 = €1.00B) $1.20 = €1.00C) $1.1547 = €1.00D) none of the optionsAnswer:A
Explanation:Solve the following forX: (1.06/1.02) × 1.2 =XTopic:Interest Rate Parity and Exchange Rate Determination
25) Will an arbitrageur facing the following prices be able to make money?BorrowingLendingBidAsk$5%4.5%Spot $1.00 = €1.00$1.01 = €1.006%5.5%Forward $0.99 = €1.00$1.00 = €1.00C
Topic:Reasons for Deviations from Interest Rate Parity26) If IRP fails to hold,DTopic:Reasons for Deviations from Interest Rate Parity
Accessibility:Keyboard Navigation27) Although IRP tends to hold, it may not hold precisely all the timeDTopic:Reasons for Deviations from Interest Rate Parity
Accessibility:Keyboard Navigation28) The interest rate at which the arbitrager borrows tends to be higher than the rate at which helends, reflecting theA) transaction cost paradigm.B) midpoint.C) bid-ask spread.D) none of the optionsAnswer:CTopic:Reasons for Deviations from Interest Rate Parity
Accessibility:Keyboard Navigation29) Governments sometimes restrict capital flows, inbound and/or outbound. They achieve this
objective by means ofC
Topic:Reasons for Deviations from Interest Rate ParityAccessibility:Keyboard Navigation

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Term
Fall
Professor
reilly brown
Tags
Foreign exchange market, United States dollar, Bank B, Bank A

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