Interest Rate Parity and Purchasing Power Parity

If interest rate parity exists, then _______ is not feasible.

• covered interest arbitrage

• locational arbitrage

• any types of arbitrage

• triangular arbitrage

In which case will locational arbitrage most likely be feasible?

• One bank’s ask price for a currency is greater than another bank’s bid price for the currency.

• One bank’s bid price for a currency is greater than another bank’s ask price for the currency.

• One bank’s ask price for a currency is less than another bank’s ask price for the currency.

• One bank’s bid price for a currency is less than another bank’s bid price for the currency.

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:

• should exhibit a discount.

• should exhibit a premium.

• should be zero (i.e., it should equal its spot rate).

• B or C

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:

• U.S. investors could possibly benefit from covered interest arbitrage.

• British investors could possibly benefit from covered interest arbitrage.

• neither U.S. nor British investors could benefit from covered interest arbitrage.

• A and B

Assume a two country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?

• If Country A’s inflation rate exceeds Country B’s inflation rate, Country A’s currency will weaken.

• If Country A’s interest rate exceeds Country B’s infla-tion rate, Country A’s currency will weaken.

• If Country A’s interest rate exceeds Country B’s infla¬tion rate, Country A’s currency will strengthen.

• If Country B’s inflation rate exceeds Country A’s infla-tion rate, Country A’s currency will weaken.

Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:

• the income differential.

• the forward discount or premium.

• the inflation differential.

• none of the above

Assume that the U.S. inflation rate rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ______________ their imports from New Zealand and New Zealand consumers to ______________ their imports from the U.S. According to purchasing power parity (PPP), this will results in a(n) ___________ of the New Zealand dollar (NZ$).

• reduce; increase; appreciation

• increase; reduce; appreciation

• reduce; increase; depreciation

• reduce; increase; appreciation

Black pearl was once

• captained by Jack Sparrow

• a black ship in a bottle

• the fastest ship

• all of the answers are correct