Deck 7: International Arbitrage and Interest Rate Parity

Question 1

The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent.

Answer 1

False

Question 2

If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

Answer 2

True

Question 3

If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.

Answer 3

False

Question 4

Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent.

Question 5

If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country.

Question 6

Locational arbitrage explains why spot exchange rates among banks at different locations normally will not differ by a significant amount.

Question 7

The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula.

Question 8

Arbitrage involves capitalizing on a discrepancy in quoted prices in an attempt to make a profit, but it entails substantial risk.

Question 9

Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.

Question 10

If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.

Question 11

The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).

Question 12

Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations.

Question 13

The yield curve for the United States normally has an upward slope, meaning that the annualized interest rate is higher for longer terms to maturity.

Question 14

Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the United States and the foreign country.

Question 15

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

Question 16

Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts.

Question 17

Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate.

Question 18

From the U.S. perspective, an example of a cross exchange rate is the exchange rate between a non-U.S. country and the United States.

Question 19

For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency.

Question 20

Triangular arbitrage involves 3 transactions that must be executed at a single bank.

Question 21

Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage.

Question 22

Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?​

A) ​$10,003
B) ​$12,063
C) ​$14,441
D) ​$16,393
E) ​$18,219

Question 23

The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

Question 24

If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

Question 25

Interest rate parity suggests that an exchange rate should change over time based on the difference in interest rates between foreign versus domestic risk-free interest-bearing securities as of today.

Question 26

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

A) covered interest arbitrage
B) locational arbitrage
C) triangular arbitrage
D) locational arbitrage AND triangular arbitrage

Question 27

Which of the following is an example of triangular arbitrage initiation?​

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
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
D) ​converting funds to a foreign currency and investing the funds overseas

Question 28

Assume the following information: U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks
=
10%
1-year deposit rate offered on British pounds
=
13)5%
1-year forward rate of British pound
=
$1)26
Spot rate of British pound
=
$1)30
​
Given this information:

A) interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
B) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible 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.

Question 29

Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

Question 30

Forward rates are driven by the government rather than market forces.

Question 31

Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, which of the following adjustments must take place?

A) One bank's ask price will rise, and the other bank's bid price will fall.
B) One bank's ask price will fall, and the other bank's bid price will rise.
C) One bank's bid/ask spread will widen, and the other bank's bid/ask spread will fall.
D) One bank's ask price will rise, and the other bank's bid price will fall AND one bank's bid/ask spread will widen, and the other bank's bid/ask spread will fall.

Question 32

Assume the following information: Current spot rate of New Zealand dollar
=
$)41
Forecasted spot rate of New Zealand dollar 1 year from now
=
$)43
One-year forward rate of the New Zealand dollar
=
$)42
Annual interest rate on New Zealand dollars
=
8%
Annual interest rate on U.S. dollars
=
9%
​
Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____ percent.

A) about 11.97
B) about 9.63
C) about 11.12
D) about 11.64
E) about 10.63

Question 33

The word "covered" in "covered interest arbitrage" refers to the investors hedging their position to protect against the possibility of default risk.

Question 34

For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective.

Question 35

Assume the following information: You have $400,000 to invest:
Current spot rate of Sudanese dinar (SDD)
=
$)00570
90-day forward rate of the Sudanese dinar
=
$)00569
90-day interest rate in the United States
=
4)0%
90-day interest rate in Sudan
=
4)2%
​
If you conduct covered interest arbitrage, what amount will you have after 90 days?

A) $421,213
B) $419,887
C) $424,242
D) $416,068

Question 36

​Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

A) ​$7,067
B) ​$8,556
C) ​$10,114
D) ​$12,238

Question 37

The yield curve of every country has its own unique shape.

Question 38

The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro's forward rate should exhibit a premium of about 3 percent.

Question 39

To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

Question 40

The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent.

Question 41

Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?​

A) ​$2,041,667
B) ​$9,804
C) ​$500
D) ​$1,639

Question 42

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 this covered interest arbitrage activity?​

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
D) ​upward pressure on the Swiss franc's forward rate

Question 43

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:

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.
D) U.S. investors could possibly benefit from covered interest arbitrage AND British investors could possibly benefit from covered interest arbitrage.

Question 44

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

A) ​downward pressure on the euro's spot rate
B) ​downward pressure on the euro's forward rate
C) ​downward pressure on the U.S. interest rate
D) ​upward pressure on the euro's interest rate

Question 45

Assume that interest rate parity holds. The Mexican interest rate is 50 percent, and the U.S. interest rate is 8 percent. Subsequently, the U.S. interest rate decreases to 7 percent. According to interest rate parity, the peso's forward ____ will ____.​

A) ​premium; increase
B) ​discount; decrease
C) ​discount; increase
D) ​premium; decrease

Question 46

Points below the IRP line represent situations where:​

A) ​covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.
B) ​covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.
C) ​covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.
D) ​covered interest arbitrage is feasible for neither domestic nor foreign investors.

Question 47

Points above the IRP line represent situations where:​

A) ​covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.
B) ​covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.
C) ​covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.
D) ​covered interest arbitrage is feasible for neither domestic nor foreign investors.

Question 48

Which of the following is not true regarding covered interest arbitrage?

A) Covered interest arbitrage is a reason for observing interest rate parity (IRP).
B) If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country.
C) When interest rate parity holds, covered interest arbitrage is not possible.
D) When interest rate disparity exists, covered interest arbitrage may not be profitable.
E) All of these are true.

Question 49

Assume the following information:​ You have $1,000,000 to invest:
Current spot rate of pound
=
$1)60
90-day forward rate of pound
=
$1)57
3-month deposit rate in U.S.
=
3%
3-month deposit rate in U.K.
=
4%
​
If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

A) ​$1,020,500
B) ​$1,045,600
C) ​$1,073,330
D) ​$1,094,230
E) ​$1,116,250

Question 50

Which of the following is not true regarding interest rate parity (IRP)?

A) When interest rate parity holds, covered interest arbitrage is not possible.
B) When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount.
C) When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium.
D) When covered interest arbitrage is not feasible, interest rate parity must hold.
E) All of these are true.

Question 51

Assume the following information: Current spot rate of Australian dollar
=
$)64
Forecasted spot rate of Australian dollar 1 year from now
=
$)59
1-year forward rate of Australian dollar
=
$)62
Annual interest rate for Australian dollar deposit
=
9%
Annual interest rate in the United States
=
6%
​
Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent.

A) about 6.60
B) about 9.00
C) about 7.33
D) about 8.14
E) about 5.59

Question 52

Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?​

A) ​$15,385
B) ​$15,625
C) ​$22,136
D) ​$31,250

Question 53

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:

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.
D) U.S. investors could possibly benefit from covered interest arbitrage AND British investors could possibly benefit from covered interest arbitrage.

Question 54

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

A) ​British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States.
B) ​U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States.
C) ​U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States.
D) ​U.S. investors will earn 10 percent whether they use covered interest arbitrage or invest in the United States.

Question 55

Exhibit 7-1
Assume the following information:
You have $300,000 to invest:
The spot bid quote for the euro (€) is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the United States is 6%
The 180-day interest rate in Europe is 8%
Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what amount will you have after 180 days?

A) $318,109.10
B) $330,000.00
C) $312,218.20
D) $323,888.90
E) None of these are correct.

Question 56

Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

A) $11,764
B) -$11,964
C) $36,585
D) $24,390
E) $18,219

Question 57

In which case will locational arbitrage most likely be feasible?​

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.

Question 58

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.​

A) ​forward realignment arbitrage
B) ​triangular arbitrage
C) ​covered interest arbitrage
D) ​locational arbitrage

Question 59

Which of the following is not true regarding covered interest arbitrage?

A) Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
B) Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk.
C) Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.
D) If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically.
E) All of these are true regarding covered interest arbitrage.

Question 60

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 United States earn the same rate of return as Germans who attempt covered interest arbitrage.
C) Americans who invest in the United States earn the same rate of return as Germans who invest in Germany.
D) Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage AND Americans who invest in the United States earn the same rate of return as Germans who attempt covered interest arbitrage.
E) None of these are correct.

Question 61

National Bank quotes the following for the British pound and the New Zealand dollar: ​
Quoted Bid Price
Quoted Ask Price
Value of a British pound (£) in $
$1)61
$1)62
Value of a New Zealand dollar (NZ$) in $
$)55
$)56
Value of a British pound in
​
​
New Zealand dollars
NZ$2.95
NZ$2.96
Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

A) $77.64
B) $197.53
C) $15.43
D) $111.80

Question 62

Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.​

A) ​appreciate; depreciate
B) ​depreciate; appreciate
C) ​depreciate; depreciate
D) ​appreciate; appreciate
E) ​remain stable; appreciate

Question 63

​Assume that interest rate parity holds, and the euro's interest rate is 9 percent while the U.S. interest rate is 12 percent. Then the euro's interest rate increases to 11 percent while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity.

A) ​discount; increase
B) ​discount; decrease
C) ​premium; increase
D) ​premium; decrease

Question 64

Assume the following information: Spot rate today of Swiss franc
=
$)60
1-year forward rate as of today for Swiss franc
=
$)63
Expected spot rate 1 year from now
=
$)64
Rate on 1-year deposits denominated in Swiss francs
=
7%
Rate on 1-year deposits denominated in U.S. dollars
=
9%
​
From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent.

A) 5.00
B) 12.35
C) 15.50
D) 14.13
E) 11.22

Question 65

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.

A) forward realignment arbitrage
B) triangular arbitrage
C) covered interest arbitrage
D) locational arbitrage

Question 66

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

A) ​forward realignment arbitrage
B) ​triangular arbitrage
C) ​covered interest arbitrage
D) ​locational arbitrage

Question 67

Which of the following is not mentioned in the text as a form of international arbitrage?

A) Locational arbitrage
B) Triangular arbitrage
C) Transactional arbitrage
D) Covered interest arbitrage
E) All of these are mentioned in the text as forms of international arbitrage.

Question 68

Assume the following information: ​
You have $1,000,000 to invest:
Current spot rate of pound
=
$1)30
90-day forward rate of pound
=
$1)28
3-month deposit rate in United States
=
3%
3-month deposit rate in Great Britain
=
4%
​
If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

A) $1,024,000
B) $1,030,000
C) $1,040,000
D) $1,034,000
E) None of these are correct.

Question 69

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:

A) interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
B) interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible 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.

Question 70

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?

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.
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.

Question 71

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

Question 72

​Assume the following information: You have $900,000 to invest:
Current spot rate of Australian dollar (A$)
=
$)62
180-day forward rate of the Australian dollar
=
$)64
180-day interest rate in the United States
=
3)5%
180-day interest rate in Australia
=
3)0%
​
If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?

A) ​$56,903
B) ​$61,548
C) ​$27,000
D) ​$31,500

Question 73

Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate and ____ pressure on the pound's forward rate.​

A) ​downward; downward
B) ​downward; upward
C) ​upward; downward
D) ​upward; upward

Question 74

You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?

A) A$39.93
B) A$25,043.48
C) A$553.00
D) None of these are correct.

Question 75

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

A) covered interest arbitrage
B) locational arbitrage
C) triangular arbitrage
D) locational arbitrage AND triangular arbitrage

Question 76

According to interest rate parity (IRP):​

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

Question 77

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

A) ​forward realignment arbitrage
B) ​triangular arbitrage
C) ​covered interest arbitrage
D) ​locational arbitrage

Question 78

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:

A) should exhibit a discount
B) should exhibit a premium
C) should be zero (i.e., it should equal its spot rate)
D) should exhibit a premium or should be zero (i.e., it should equal its spot rate)

Question 79

Exhibit 7-1
Assume the following information:
​
You have $300,000 to invest:
The spot bid quote for the euro (€) is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the United States is 6%
The 180-day interest rate in Europe is 8%
​
Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?

A) 7.96 percent; feasible
B) 6.04 percent; feasible
C) 6.04 percent; not feasible
D) 4.07 percent; not feasible
E) 10.00 percent; feasible

Question 80

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?

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.
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.