Question 1

Covered Interest Arbitrage
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 Covered Interest Arbitrage
Assume that you are a...

Question 2

There is (at least)one profitable arbitrage at these prices.What is it?

Accepted Answer

The answer of There is (at least)one profitable arbitrage at...

Question 3

Purchasing Power Parity (PPP)theory states that

Accepted Answer

A) the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels. 
B) as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies. 
C) the prices of standard commodity baskets in two countries are not related. 
D) both a and b

Question 4

The International Fisher Effect suggests that

Accepted Answer

A) any forward premium or discount is equal to the expected change in the exchange rate. 
B) any forward premium or discount is equal to the actual change in the exchange rate 
C) the nominal interest rate differential reflects the expected change in the exchange rate. 
D) an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.

Question 5

Generally unfavorable evidence on PPP suggests that

Accepted Answer

A) substantial barriers to international commodity arbitrage exist. 
B) tariffs and quotas imposed on international trade can explain at least some of the evidence. 
C) shipping costs can make it difficult to directly compare commodity prices. 
D) all of the above

Question 6

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Accepted Answer

A) €1.5291/$ 
B) $1.5291/€ 
C) €1.4714/$ 
D) $1.4714/€

Question 7

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 3% APR in the U.S.and 5% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Accepted Answer

A) €1.5291/$ 
B) $1.5291/€ 
C) €1.4714/$ 
D) $1.4714/€

Question 8

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Accepted Answer

A) €1.00 = $1.2379 
B) €1.00 = $1.2623 
C) €1.00 = $0.9903 
D) $1.00 = €1.2623

Question 9

Suppose that the one-year interest rate is 4.0 percent in the Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must one-year interest rate be in the United States?

Accepted Answer

A) 2% 
B) 2.7% 
C) 5.32% 
D) None of the above

Question 10

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i_€ = 4%.

Accepted Answer

The answer of USING YOUR PREVIOUS ANSWERS and a bit...

Question 11

The Fisher effect can be written for the United States as:

Accepted Answer

A)  $i _ { \$ } = \rho _ { \$ } + \mathrm { E } \left( \pi _ { \$ } \right) + \rho _ { \mathrm { s } } \times \mathrm { E } \left( \pi _  { \$}  \right)$ 
B)  $\rho _ { \$ } = i _ { \$ } + \mathrm { E } \left( \pi _ { \$ } \right) + i _ { \$ } \times \mathrm { E } \left( \pi _ { \$} \right)$ 
C)  $q = \frac { 1 + \pi _ { \$ } } { ( 1 + e ) \left( 1 + \pi _ { \epsilon } \right) }$ 
D)  $\frac { F ( \$ / € ) } { S ( \$ / € ) } = \frac { 1 + i _ { \$ } } { 1 + i _ { € } }$

Question 12

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m,traded for dollars at the spot rate and invested at i_$ = 4%.

Accepted Answer

The answer of USING YOUR PREVIOUS ANSWERS and a bit...

Question 13

Covered Interest Arbitrage  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 Covered Interest Arbitrage  Please note that...

Question 14

Studies of the accuracy of paid exchange rate forecasters

Accepted Answer

A) tend to support the view that "you get what you pay for". 
B) tend to support the view that forecasting is easy, at least with regard to major currencies like the euro and Japanese yen. 
C) tend to support the view that banks do their best forecasting with the yen. 
D) none of the above

Question 15

If a foreign county experiences a hyperinflation,

Accepted Answer

A) its currency will depreciate against stable currencies. 
B) its currency may appreciate against stable currencies. 
C) its currency may be unaffected-it's difficult to say. 
D) none of the above

Question 16

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

Question 17

Covered Interest Arbitrage
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 Covered Interest Arbitrage
Assume that you are a...

Question 18

There is (at least)one profitable arbitrage at these prices.What is it?

Accepted Answer

The answer of There is (at least)one profitable arbitrage at...

Question 19

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

Question 20

If the exchange rate follows a random walk

Accepted Answer

A) the future exchange rate is unpredictable. 
B) the future exchange rate is expected to be the same as the current exchange rate, St = E(St+1). 
C) the best predictor of future exchange rates is the forward rate Ft = E(St+1|It). 
D) both b and c

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

Covered Interest Arbitrage 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?

There is (at least)one profitable arbitrage at these prices.What is it?

Purchasing Power Parity (PPP) theory states that

The International Fisher Effect suggests that

Generally unfavorable evidence on PPP suggests that

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 3% APR in the U.S.and 5% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Suppose that the one-year interest rate is 4.0 percent in the Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must one-year interest rate be in the United States?

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i_€ = 4%.

The Fisher effect can be written for the United States as:

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m,traded for dollars at the spot rate and invested at i_$ = 4%.

Covered Interest Arbitrage 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?

Studies of the accuracy of paid exchange rate forecasters

If a foreign county experiences a hyperinflation,

Covered Interest Arbitrage 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?

There is (at least)one profitable arbitrage at these prices.What is it?

If the exchange rate follows a random walk

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

Covered Interest Arbitrage 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?

There is (at least)one profitable arbitrage at these prices.What is it?

Purchasing Power Parity (PPP) theory states that

The International Fisher Effect suggests that

Generally unfavorable evidence on PPP suggests that

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 3% APR in the U.S.and 5% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Suppose that the one-year interest rate is 4.0 percent in the Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must one-year interest rate be in the United States?

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i€ = 4%.

The Fisher effect can be written for the United States as:

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m,traded for dollars at the spot rate and invested at i$ = 4%.

Covered Interest Arbitrage 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?

Studies of the accuracy of paid exchange rate forecasters

If a foreign county experiences a hyperinflation,

Covered Interest Arbitrage 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?

There is (at least)one profitable arbitrage at these prices.What is it?

If the exchange rate follows a random walk

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i_€ = 4%.

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m,traded for dollars at the spot rate and invested at i_$ = 4%.