Ch 7-8 Exam Study Guide
1 Covered 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
2 You 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
3 Arbitrage 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
4 The $/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
5 Assuming 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
6 Which 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
7 If the annual U.S. interest rate is 5%, and the annual Euro interest rate is 7%, the ________ rate of the Euro should
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
2 You 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
3 Arbitrage 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
4 The $/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
5 Assuming 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
6 Which 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
7 If the annual U.S. interest rate is 5%, and the annual Euro interest rate is 7%, the ________ rate of the Euro should