Deck 11: International Arbitarage

Question 1

Which of the following statements is or are correct?

A) Arbitrage is generally defined as capitalizing on a discrepancy in quoted prices as a result of a violation of and equilibrium condition.
B) The arbitrage process theoretically restores equilibrium.
C) The importance of arbitrage is that no-arbitrage conditions are used for asset pricing.
D) All of the answers given are correct.

Answer 1

All of the answers given are correct.

Question 2

Calculate the Australian dollar profit, if any, on a two-point arbitrage. You are given the following exchange rate quotes in the markets identified: ‪

A) 16.9 points
B) AUD0.0169
C) Nil
D) USD0.0048

Answer 2

AUD0.0169

Question 3

Calculate the Australian dollar profit, if any, on a two-point arbitrage. You are given the following exchange rate quotes in the markets identified:

A) AUD0.0131
B) AUD1.0131
C) Nil
D) 13.1 points

Answer 3

AUD0.0131

Question 4

Calculate the US dollar profit, if any, on a three-point arbitrage. You are given the following exchange rate quotes in Sydney:

A) USD0.2320 for every 1 USD invested
B) USD0.0043 for every 1 USD invested
C) USD1.0043 for every 1 USD invested
D) Nil

Question 5

Calculate the US dollar profit, if any, on a three-point arbitrage. You are given the following exchange rate quotes in Sydney:

A) USD0.0086 for every 1 USD invested
B) USD0.0043 for every 1 USD invested
C) USD1.0086 for every 1 USD invested
D) Nil

Question 6

If the domestic currency price of a commodity is greater than the domestic currency equivalent of the foreign price of the same commodity, then according to the LOP:

A) the foreign price must rise
B) the exchange rate must rise
C) the foreign price must rise and/or the exchange rate must rise
D) the foreign currency must depreciate

Question 7

If the foreign currency equivalent of the domestic price of a commodity is less than the foreign price of the same commodity, then the LOP implies that:

A) the foreign currency is overvalued
B) the foreign currency is undervalued
C) the domestic currency is overvalued
D) none of the given answers

Question 8

If the interest rate differential and the forward spread are positive and equal then:

A) the foreign currency should offer a higher interest rate and sell at a forward discount
B) the foreign currency should offer a higher interest rate and sell at a forward premium
C) the domestic currency should offer a higher interest rate and sell at a forward premium
D) the domestic currency should offer a higher interest rate and sell at a forward discount

Question 9

If the interest rate differential and the forward spread are negative and equal then:

A) the foreign currency should offer a higher interest rate and sell at a forward discount
B) the foreign currency should offer a higher interest rate and sell at a forward premium
C) the domestic currency should offer a higher interest rate and sell at a forward premium
D) the domestic currency should offer a higher interest rate and sell at a forward discount

Question 10

If the interest rate differential and the forward spread are positive and the interest differential is lower than the spread then:

A) the foreign currency should offer a higher interest rate and sell at a forward discount
B) the foreign currency should offer a higher interest rate and sell at a forward premium
C) the domestic currency should offer a higher interest rate and sell at a forward premium
D) the domestic currency should offer a higher interest rate and sell at a forward discount

Question 11

Under which of the following conditions will outward arbitrage be triggered?

A) The interest rate differential and forward spread are positive and the differential is greater than the spread
B) The interest rate differential and forward spread are negative and the absolute value of the interest . differential is lower than the absolute value of the spread
C) The interest rate differential and forward spread are positive and the interest differential is lower than the spread
D) The interest rate differential is positive while the spread is negative

Question 12

Under which of the following conditions will inward arbitrage be triggered?

A) The interest rate differential and forward spread are positive and the differential is lower than the spread
B) The interest rate differential and forward spread are negative and the absolute value of the interest . differential is lower than the absolute value of the spread
C) The interest rate differential and forward spread are negative and the absolute value of the interest differential is greater than the absolute value of the spread
D) The interest rate differential is negative while the spread is positive

Question 13

Outward covered arbitrage does not cause:

A) a rise in the domestic interest rate
B) a fall in the foreign interest rate
C) a fall in the forward exchange rate
D) a fall in the spot exchange rate

Question 14

Inward covered arbitrage does not cause:

A) a fall in the domestic interest rate
B) a rise in the foreign interest rate
C) a rise in the spot exchange rate
D) a rise in the forward exchange rate

Question 15

Calculate the precise outward covered margin from an Australian perspective.You are given the following information:

A) 2 basis points
B) -2 basis points
C) 257 basis points
D) -259 basis points

Question 16

Calculate the precise inward covered margin from an Australian perspective. You are given the following information:

A) 2 basis points
B) -2 basis points
C) 257 basis points
D) -259 basis points

Question 17

Calculate the precise outward covered margin from a U.S. perspective. You are given the following information:

A) 2 basis points
B) -2 basis points
C) 257 basis points
D) -259 basis points

Question 18

If the net foreign return is lower than the domestic interest rate then:

A) the interest parity forward rate is lower than the actual forward rate
B) the interest parity forward rate is higher than the actual forward rate
C) the interest rate differential is lower than the forward spread
D) none of the given answers

Question 19

If the gross domestic return is higher than the gross covered foreign return then:

A) the interest parity forward rate is lower than the actual forward rate
B) the interest rate differential is lower than the forward spread
C) the interest parity forward rate is higher than the actual forward rate
D) none of the given answers

Question 20

The demand for forward contracts by arbitragers depends on the difference between:

A) the expected spot rate and the actual forward rate
B) the expected spot rate and the expected forward rate
C) the interest parity forward rate and the actual forward rate
D) the expected forward rate and the actual forward rate

Question 21

The demand for forward contracts by spot speculators on the difference between:

A) the expected spot rate and the actual forward rate
B) the expected spot rate and the expected forward rate
C) the interest parity forward rate and the actual forward rate
D) the expected forward rate and the actual forward rate

Question 22

The demand for forward contracts by forward speculators depends on the difference between:

A) the expected spot rate and the actual forward rate
B) the expected spot rate and the expected forward rate
C) the interest parity forward rate and the actual forward rate
D) the expected forward rate and the actual forward rate

Question 23

If CIP holds, what should be the AUD/USD three-month forward exchange rate, according to the precise CIP formula? You are given the following information: ‪

A) AUD/USD 1.8261
B) AUD/USD 1.7083
C) AUD/USD 1.7512
D) AUD/USD 1.7813

Question 24

If CIP holds, what should be the AUD/USD three-month forward exchange rate, according to the approximate CIP formula? You are given the following information:

A) AUD/USD 1.8261
B) AUD/USD 1.7083
C) AUD/USD 1.7814
D) AUD/USD 1.7813

Question 25

In the presence of bid-offer spreads, outward arbitrage comes to an end when:

A) the difference between the domestic bid interest rate and the foreign offer interest rate is equal to the difference between the forward spread and the bid-offer spread
B) the difference between the domestic offer interest rate and the foreign bid interest rate is equal to the . difference between the forward spread and the bid-offer spread
C) the difference between the domestic offer interest rate and the foreign offer interest rate is equal to the forward spread
D) the difference between the domestic bid interest rate and the foreign bid interest rate is equal to the bid-offer spread

Question 26

In the presence of bid-offer spreads, inward arbitrage comes to an end when:

A) the difference between the domestic offer interest rate and the foreign bid interest rate is equal to the sum of the forward spread and the bid-offer spread
B) the difference between the domestic bid interest rate and the foreign bid interest rate is equal to the sum of the forward spread and the bid-offer spread
C) the difference between the domestic bid interest rate and the foreign offer interest rate is equal to the . sum of the forward spread and the bid-offer spread
D) the difference between the domestic offer interest rate and the foreign offer interest rate is equal to . the difference between the forward spread and the bid-offer spread

Question 27

Calculate the precise inward covered margin from an Australian perspective. You are given the following information:

A) 152 basis points
B) -146 basis points
C) 68 basis points
D) 298 basis points

Question 28

Calculate the precise outward covered margin from an Australian perspective. You are given the following information:

A) -46 basis points
B) -151 basis points
C) 149 basis points
D) -448 basis points

Question 29

Calculate the approximate inward covered margin from an Australian perspective. You are given the following information:

A) 152 basis points
B) -147 basis points
C) 68 basis points
D) 298 basis points

Question 30

UIP can be obtained by combining:

A) CIP and unbiased efficiency
B) ex ante PPP and unbiased efficiency
C) ex ante PPP and general efficiency
D) CIP and cross-sectional efficiency

Question 31

Which of the following does NOT represent the UIP equilibrium condition?

A) Gross domestic return is equal to the expected uncovered gross foreign return
B) The interest parity forward rate is equal to the expected spot rate
C) The interest parity forward rate is equal to the actual forward rate
D) The interest differential is equal to the expected percentage change in the spot exchange rate

Question 32

UIP implies that:

A) the currency offering the lower interest tends to depreciate
B) the currency offering the higher interest tends to appreciate
C) the currency offering the higher interest rate tends to depreciate
D) neither of the currencies is expected to change since it is implicitly assumed that the expected change in the exchange rate is zero

Question 33

Which of the following conditions will NOT trigger outward uncovered arbitrage?

A) The interest parity forward rate is higher than the expected spot rate
B) The expected spot rate is higher than the interest parity forward rate
C) The interest differential is less than the expected percentage change in the spot exchange rate
D) The expected uncovered foreign return is greater than the domestic interest rate

Question 34

Which of the following will NOT trigger inward uncovered arbitrage?

A) The interest parity forward rate is higher than the expected change in the exchange rate
B) The domestic interest rate is higher than the net expected uncovered foreign return
C) The expected percentage change in the spot exchange rate is less than the interest differential
D) The expected percentage change in the spot exchange rate is greater than the interest differential

Question 35

Under which of these conditions will outward uncovered arbitrage be profitable?

A) The foreign interest rate is lower than the domestic interest rate, and the foreign currency appreciates by more than the interest differential
B) The foreign interest rate is higher than the domestic interest rate, and the foreign currency depreciates by more than the interest differential
C) The foreign interest rate is less than the domestic rate, and the domestic currency stays unchanged
D) The foreign interest rate is higher than the domestic interest rate, and the foreign currency depreciates by a percentage which is equal to the interest differential

Question 36

Under which of these conditions will inward uncovered arbitrage be profitable?

A) The foreign interest rate is lower than the domestic interest rate, and the foreign currency appreciates by more than the interest differential
B) The foreign interest rate is higher than the domestic interest rate, and the foreign currency appreciates by more than the interest differential
C) The foreign interest rate is less than the domestic rate, and the domestic currency stays unchanged
D The foreign interest rate is higher than the domestic interest rate, and the foreign currenc depreciates by a percentage which is equal to the interest differential

Question 37

Calculate the precise inward uncovered margin from an Australian perspective. You are given the following information:

A) 2,197 basis points
B) -1,375 basis points
C) 1,986 basis points
D) Nil

Question 38

If UIP holds, what should the AUD/USD exchange rate be in six months time, according to the approximate UIP formula? You are given the following information:

A) 1.8257
B) 1.7957
C) 1.7364
D) 1.7662

Question 39

Calculate the precise outward uncovered margin from an Australian perspective. You are given the following information:

A) -46 basis points
B) -1,874 basis points
C) 149 basis points
D) -448 basis points

Question 40

Calculate the approximate inward uncovered margin from an Australian perspective. You are given the following information:

A) 152 basis points.
B) 1,518 basis points.
C) 68 basis points.
D) 298 basis points.