International Arbitrage Quiz

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.

• forward realignment arbitrage

• triangular arbitrage

• covered interest arbitrage

• locational arbitrage

Due to ____, market forces should realign the spot rate of a currency among banks.

• forward realignment arbitrage

• triangular arbitrage

• covered interest arbitrage

• locational arbitrage

Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.

• forward realignment arbitrage

• triangular arbitrage

• covered interest arbitrage

• locational arbitrage

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

• forward realignment arbitrage

• triangular arbitrage

• covered interest arbitrage

• locational 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.

When using ____, funds are not tied up for any length of time.

• covered interest arbitrage

• locational arbitrage

• triangular arbitrage

• B and C

When using ____, funds are typically tied up for a significant period of time.

• covered interest arbitrage

• locational arbitrage

• triangular arbitrage

• B and C

Assume that the interest rate in the home country of Currency X is much higher 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 United States 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

If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

• 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