Ch 7-8 Exam Study Guide

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1Covered interest arbitrage refers to:
a.making a riskless profit off of exploiting a mispriced forward rate. b.making a riskless profit off of mispricing in crossrates. c.making a riskless profit off of different spot rates from two different banks. d.None of the answers are correct.

correct: a
2You observe the following bid-ask quotes from Dragon Bank and Skytel Bank for the Euro: $1.25-$1.28 and $1.27-$1.29. Is there a profit from locational arbitrage? a.yes, the profit is $0.02/Euro

b.yes, the profit is $0.04/Euro
c.no, there will be a loss of $0.01/Euro
d.no, there will be a loss of $0.04/Euro
correct: c
3Arbitrage is:
a.the process of taking risks and making profits off of trading. b.the process of trading to offset risks on a cash market position. c.the process of making a riskless profit.
d.None of the answers are correct.
correct: c
4The $/Pound spot rate is $1.56. The one-year nominal U.S. interest rate is 3%. The one-year nominal UK interest rate is 5%. What is the equilibrium one-year forward rate if interest rate parity theorem holds? a.$1.56

b.$1.62
c.$1.53
d.$1.59
correct: c

5Assuming that IRP exists, if the spot rate of the Singapore dollar is $.55 and the three-month forward rate is $.58, then: a.the U.S. interest rate must be higher than Singapore's interest rate. b.the U.S. interest rate must be lower than Singapore's interest rate. c.the U.S. interest rate must equal Singapore's interest rate. d.covered interest arbitrage is feasible.

correct: a
6Which of the following institutions makes sure that forward rates are priced according to IRP at a given point in time? a.the world bank
b.the fed and the central banks of other countries
c.the bank for international settlements
d.banks and individuals arbitraging in the foreign exchange markets correct: d
7If the annual U.S. interest rate is 5%, and the annual Euro interest rate is 7%, the ________ rate of the Euro should have a ________. a.spot; discount of about 2%
b.spot; premium of about 2%
c.forward; premium of about 2%
d.forward; discount of about 2%
correct: d
8If the annual U.S. interest rate is 5%, and the annual Euro interest rate is 3%, the ________ rate of the Euro should have a ________. a.spot; discount of about 2%
b.spot; premium of about 2%
c.forward; premium of about 2%
d.forward; discount of about 2%
correct: c

9The bid-ask quotes for the Pound spot rate is $1.60-$1.62 and for the Canadian dollar spot rate is $0.65-$0.69. What is the Pound/C$ crossrate? a.$1.04-$1.12
b.$0.40-$0.43
c.$0.28-$0.32
d.None of the answers are correct.
correct: b
10Locational arbitrage refers to:
a.making a riskless profit off of mispricing in spot exchange rates between two banks. b.making a riskless profit off of exploiting mispricing between the forward and spot markets. c.making a riskless profit off of mispricing of crossrates. d.None of the answers are correct.

correct: a
11The spot Pound spot rate is $1.56. The $/Euro spot rate is $1.25. A bank quotes the Pound/Euro crossrate as Pound 0.94/Euro. What is the profit per dollar from triangular arbitrage? a.$0.45
b.$0.17
c.$0.22
d.-0.17
correct: b
12The Pound spot rate is $1.56. The one-year forward rate is $1.60. The one-year nominal U.S. interest rate is 3%. The one-year nominal UK interest rate is 5%. What is the profit per dollar from covered interest arbitrage? a.$0.047

b.$0.085
c.$0.11
d.-$0.052
correct: a
13If interest rate parity exists, then ________ is not feasible. a.triangular arbitrage
b.covered interest arbitrage
c.locational arbitrage
d.None of the answers are correct.
correct: b
14If the Pound spot rate today is $1.56, and the one-year forward rate is $1.60: a.the dollar is selling at a forward premium to the Pound of approximately 1.39%. b.the dollar is selling at a forward premium to the Pound of approximately 4.20%. c.the Pound is selling at a...
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