Question 1

An arbitrage is best defined as

Accepted Answer

A) A legal condition imposed by the CFTC. 
B) The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. 
C) The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits. 
D) None of the above 
A) A legal condition imposed by the CFTC. 
B) The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. 
C) The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits. 
D) None of the above

Question 2

If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Accepted Answer

The answer of If you had borrowed $1,000,000 and traded...

Question 3

Assume that you are a retail customer   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward ASK exchange rate in $ per € that that satisfies IRP from the perspective of a customer.

Accepted Answer

The answer of Assume that you are a retail customer...

Question 4

The price of a McDonald's Big Mac sandwich

Accepted Answer

A) is about the same in the 120 countries that McDonalds does business in. 
B) varies considerably across the world in dollar terms. 
C) supports PPP. 
D) none of the above. 
A) is about the same in the 120 countries that McDonalds does business in. 
B) varies considerably across the world in dollar terms. 
C) supports PPP. 
D) none of the above.

Question 5

Although IRP tends to hold,it may not hold precisely all the time

Accepted Answer

A) due to transactions costs, like the bid ask spread. 
B) due to asymmetric information. 
C) due to capital controls imposed by governments. 
D) both a) and c) 
A) due to transactions costs, like the bid ask spread. 
B) due to asymmetric information. 
C) due to capital controls imposed by governments. 
D) both a) and c)

Question 6

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid).   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-There is (at least)one profitable arbitrage at these prices.What is it?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 7

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate by the way)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.The interest rate in Japan (on an investment of comparable risk)is 13 percent.What is your strategy?

Accepted Answer

A) Take $1m, invest in U.S.T-bills. 
B) Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months. 
C) Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract. 
D) Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract. 
A) Take $1m, invest in U.S.T-bills. 
B) Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months. 
C) Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract. 
D) Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.

Question 8

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and the one-year forward exchange rate is $1.16/€.What must the spot exchange rate be?

Accepted Answer

A) $1.1768/€ 
B) $1.1434/€ 
C) $1.12/€ 
D) None of the above 
A) $1.1768/€ 
B) $1.1434/€ 
C) $1.12/€ 
D) None of the above

Question 9

Suppose that the one-year interest rate is 3.0 percent in the Italy,the spot exchange rate is $1.20/€,and the one-year forward exchange rate is $1.18/€.What must one-year interest rate be in the United States?

Accepted Answer

A) 1.2833% 
B) 1.0128% 
C) 4.75% 
D) None of the above 
A) 1.2833% 
B) 1.0128% 
C) 4.75% 
D) None of the above

Question 10

Good,inexpensive,and fairly reliable predictors of future exchange rates include

Accepted Answer

A) today's exchange rate. 
B) current forward exchange rates (e.g.the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today). 
C) esoteric fundamental models that take an econometrician to use and no one can explain. 
D) both a) and b) 
A) today's exchange rate. 
B) current forward exchange rates (e.g.the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today). 
C) esoteric fundamental models that take an econometrician to use and no one can explain. 
D) both a) and b)

Question 11

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain profit via covered interest arbitrage.

Accepted Answer

A) Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600. 
B) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400. 
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000. 
D) Both c) and b) 
A) Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600. 
B) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400. 
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000. 
D) Both c) and b)

Question 12

Some commodities never enter into international trade.Examples include

Accepted Answer

A) nontradables. 
B) haircuts. 
C) housing. 
D) all of the above 
A) nontradables. 
B) haircuts. 
C) housing. 
D) all of the above

Question 13

Assume that you are a retail customer   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 14

Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

The answer of   Please note that your answers...

Question 15

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid).   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 16

If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of If you borrowed $1,000,000 for one year,how...

Question 17

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%.The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?

Accepted Answer

A) $1.2471 = €1.00 
B) $1.20 = €1.00 
C) $1.1547 = €1.00 
D) none of the above 
A) $1.2471 = €1.00 
B) $1.20 = €1.00 
C) $1.1547 = €1.00 
D) none of the above

Question 18

If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

The answer of If you had €1,000,000 and traded it...

Question 19

Assume that you are a retail customer   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 20

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/€ and the forward exchange rate,with one-year maturity,is $1.16/€.Assume that an arbitrager can borrow up to $1,000,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

Accepted Answer

A) $10,690 
B) $15,000 
C) $46,207 
D) $21,964.29 
A) $10,690 
B) $15,000 
C) $46,207 
D) $21,964.29

An arbitrage is best defined as

If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

The price of a McDonald's Big Mac sandwich

Although IRP tends to hold,it may not hold precisely all the time

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -There is (at least)one profitable arbitrage at these prices.What is it?

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and the one-year forward exchange rate is $1.16/€.What must the spot exchange rate be?

Suppose that the one-year interest rate is 3.0 percent in the Italy,the spot exchange rate is $1.20/€,and the one-year forward exchange rate is $1.18/€.What must one-year interest rate be in the United States?

Good,inexpensive,and fairly reliable predictors of future exchange rates include

Some commodities never enter into international trade.Examples include

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

An arbitrage is best defined as

If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

The price of a McDonald's Big Mac sandwich

Although IRP tends to hold,it may not hold precisely all the time

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -There is (at least)one profitable arbitrage at these prices.What is it?

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and the one-year forward exchange rate is $1.16/€.What must the spot exchange rate be?

Suppose that the one-year interest rate is 3.0 percent in the Italy,the spot exchange rate is $1.20/€,and the one-year forward exchange rate is $1.18/€.What must one-year interest rate be in the United States?

Good,inexpensive,and fairly reliable predictors of future exchange rates include

Some commodities never enter into international trade.Examples include

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters