Question 1

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.

Accepted Answer

Even if IRP does not hold, covered interest arbitrage may still not be worthwhile due to additional factors such as transaction costs, currency restrictions, and differential tax laws.

Question 2

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 the above are true regarding covered interest arbitrage.

Accepted Answer

Covered interest arbitrage opportunities exist when the foreign interest rate is higher than the interest rate in the home country, but it is not the only condition. Other factors, such as transaction costs and restrictions on capital movement, also need to be considered when determining whether a covered interest arbitrage opportunity exists.

Question 3

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 the above are mentioned in the text as forms of international arbitrage.

Accepted Answer

The text mentions locational arbitrage, triangular arbitrage, and covered interest arbitrage as forms of international arbitrage, but does not mention transactional arbitrage.

Question 4

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 the above are true.

Accepted Answer

The answer of Which of the following is not true...

Question 5

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​

Accepted Answer

This is true because points to the left of the IRP line represent situations where the foreign currency has a forward discount relative to the spot rate. This means that a U.S. investor will not be able to earn a higher return by borrowing in dollars and investing in the foreign currency because the return on the investment will be offset by the discounted forward exchange rate. However, a foreign investor can benefit from covered interest arbitrage in this situation by borrowing in their local currency at a lower interest rate, converting the funds to dollars, investing in U.S. dollar-denominated assets, and then using the forward market to lock in a higher exchange rate when they convert the dollars back to their local currency.

Question 6

Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?​
A)$6,053.27
B)$5,030.45
C)$6,090.13
D)Triangular arbitrage is not possible in this case.

Accepted Answer

The answer of Hewitt Bank quotes a value for the...

Question 7

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:​
A)buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.
B)buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.
C)buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.
D)buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.
E)Locational arbitrage is not possible in this case.

Accepted Answer

The answer of American Bank quotes a bid rate of...

Question 8

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​

Accepted Answer

The relationship between interest rates and forward rate premiums or discounts is determined by the interest rate parity theory, which suggests that the difference in interest rates between two countries will be equal to the difference between the spot exchange rate and the forward exchange rate. However, the exact premium or discount on the forward rate cannot be directly inferred to be the simple difference between the two interest rates without considering other factors such as market expectations, inflation rates, and risk premiums.

Question 9

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​

Accepted Answer

This is consistent with the interest rate parity formula, which states that the forward exchange rate should be equal to the spot exchange rate adjusted for the difference in interest rates between the two currencies. As the foreign interest rate increases relative to the home interest rate, the forward discount of the foreign currency will increase as well, making the foreign currency less expensive in the forward market.

Question 10

Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, 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)A and C

Accepted Answer

The answer of Assume you discovered an opportunity for locational...

Question 11

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

Accepted Answer

The answer of If interest rate parity (IRP) exists, then...

Question 12

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 the above are true.

Accepted Answer

This statement is incorrect. Interest rate parity can hold without the possibility of covered interest arbitrage, as other factors such as transaction costs or capital controls may prevent arbitrage opportunities. Choices A, B, and C are all true statements regarding interest rate parity.

Quiz 7: International Arbitrage and Interest Rate Parity

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.

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

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

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

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

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR) ; National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:

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

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

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

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

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

Quiz 7: International Arbitrage and Interest Rate Parity

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.

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

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

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

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​

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR) ; National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:​

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​

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​

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

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

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

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

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

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

American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR) ; National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:

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

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