8. 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:

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

9. 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:

b. British investors could possibly benefit from covered interest arbitrage.

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

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

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

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

b. British investors could possibly benefit from covered interest arbitrage.

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

11. Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?

b. downward pressure on the euro's forward rate.

a. downward pressure on the euro's spot rate.

c. downward pressure on the U.S. interest rate.

d. upward pressure on the euro's interest rate.

12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?

d. upward pressure on the Swiss franc's forward rate.

a. upward pressure on the Swiss franc's spot rate.

b. upward pressure on the U.S. interest rate.

c. downward pressure on the Swiss interest rate.

13. Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

a. spot rate of peso increases; forward rate of peso decreases.

b. spot rate of peso decreases; forward rate of peso increases.

c. spot rate of peso decreases; forward rate of peso decreases.

d. spot rate of peso increases; forward rate of peso increases.

15. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:

a. larger will be the forward discount of the foreign currency.

b. larger will be the forward premium of the foreign currency.

c. smaller will be the forward premium of the foreign currency.

d. smaller will be the forward discount of the foreign currency.

17. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:

d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

a. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.

b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.

c. U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S.

18. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars = 12% 1-year deposit rate offered on Singapore dollars = 10% 1-year forward rate of Singapore dollars = $.412 Spot rate of Singapore dollar = $.400 Given this information:

b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

20. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank A $1.41 $1.42 Bank B $1.39 $1.40 As locational arbitrage occurs:

d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.

b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.

c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.

22. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:

b. larger will be the forward premium of the foreign currency.

a. larger will be the forward discount of the foreign currency.

c. smaller will be the forward premium of the foreign currency.

d. smaller will be the forward discount of the foreign currency.

25. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S. $ = $.32 Exchange rate of pound in U.S. $ = $1.50 Exchange rate of pound in Singapore dollars = S$4.50 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should depreciate, and the pound value in Singapore dollars should appreciate.

a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.

27. Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

a. Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage.

b. Americans who invest in the U.S. earn the same rate of return as Germans who attempt covered interest arbitrage.

c. Americans who invest in the U.S. earn the same rate of return as Germans who invest in Germany

28. Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:

b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.

a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland.

33. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $.62 Spot rate of Swiss franc = $.60 Given this information:

b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

35. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1.61 $1.63 Bank D $1.58 $1.60 As locational arbitrage occurs:

d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase.

b. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease.

c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease.

37. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S. $ = $.60 Exchange rate of pound in U.S. $ = $1.50 Exchange rate of pound in Singapore dollars = S$2.6 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.

d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

39. Which of the following is an example of triangular arbitrage initiation?

c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.

a. buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask.

b. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20.

d. converting funds to a foreign currency and investing the funds overseas.

46. According to interest rate parity (IRP):

d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies

a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.

b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.

c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.

Chap 7 TCQT

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

51. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

a. True

b. False

MULTIPLE CHOICE QUESTION

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

b. One bank's bid price for a currency is greater than another bank's ask price for the currency.

c. One bank's ask price for a currency is less than another bank's ask price for the currency.

d. One bank's bid price for a currency is less than another bank's bid price for the currency.

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Chap 7 TCQT

51. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

52. The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro's forward rate should exhibit a premium of about 3%.

1. 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.

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

3. 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.

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

5. In which case will locational arbitrage most likely be feasible?

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

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

8. 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:

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