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Chapter_7_International_Arbitrage_and_Interest_Rate_Parity答案加解释

Chapter 7 International Arbitrage and Interest Rate Parity

1. 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

ANSWER: C抛补套利(covered interest arbitrage)是指将套利arbitrage和掉期swap交易结合起来进行的外汇交易,套利者在把资金从甲地调往乙地以获取较高利息的同时,还在外汇市场上卖出远期的乙国货币以防止风险。

2. 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

利用地点建不同汇率赚钱

ANSWER: D

3. 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

ANSWER: B

三角套利是利用多种汇价在不同市场间的差价进行套利动作

4. If interest rate parity exists, then _______ is not feasible.

A) forward realignment arbitrage

B) triangular arbitrage

C) covered interest arbitrage

D) locational arbitrage

套利者能不断进行抛补套利,直到利率平价成立

ANSWER: C

5. 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.

银行有货币买卖的差价B银行的买入价大于A银行的卖出价

ANSWER: B

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

A) covered interest arbitrage

B) locational arbitrage

C) triangular arbitrage

D) B and C

抛补套利受时间限制

ANSWER: D

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

A) covered interest arbitrage

B) locational arbitrage

C) triangular arbitrage

D) B and C

ANSWER: A

8. Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

A) should exhibit a discount. 高利率高贴现率

B) should exhibit a premium.

C) should be zero (i.e., it should equal its spot rate).

D) B or C

ANSWER: A

9. If the interest rate is higher in the U.S. 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(平价), then:

A).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) A and B

利率低的那个获利

ANSWER: B

10. If the interest rate is lower in the U.S. 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) A and B

dide

ANSWER: A

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

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.

ANSWER: B

12. 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 the act of this covered interest arbitrage?

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.

ANSWER: D

13. Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of

the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces

should occur?

A) spot rate of peso increases; forward rate of peso decreases.

B) spot rate of peso decreases; forward rate of peso increases.

C) spot rate of peso decreases; forward rate of peso decreases.

D) spot rate of peso increases; forward rate of peso increases.

ANSWER: A

14. 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.

ANSWER: A

SOLUTION: $1,000,000/$.325 = NZ$3,076,923 x $.33 = $1,015,385. Thus, the profit is $15,385.

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

ANSWER: A

16. 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 U.S. = 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 the above

ANSWER: A

SOLUTION: $1,000,000/$1.30 = 769,231 pounds x (1.04) = 800,000 pounds x 1.28 = $1,024,000

17. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. 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 U.S.

B) U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.

C) U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S.

D) U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

ANSWER: D

18. Assume the following information:

U.S. investors have $1,000,000 to invest

1-year deposit rate offered on U.S. dollars = 12%

1-year deposit rate offered on Singapore dollars = 10%

1-year forward rate of Singapore dollars = $.412

Spot rate of Singapore dollar = $.400

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.

ANSWER: B

SOLUTION: $1,000,000/$.400 = S$2,500,000 x (1.1)

= S$2,750,000 x $.412 = $1,133,000

Yield = ($1,133,000 - $1,000,000)/$1,000,000 = 13.3%

This yield exceeds what is possible domestically.

19. 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 _______%.

A) about 11.97

B) about 9.63

C) about 11.12

D) about 11.64

E) about 10.63

ANSWER: E

SOLUTION: $500,000/$.41 = NZ$1,219,512 x (1.08)

= NZ$1,317,073 x .42 = $553,171

Yield = ($553,171 - $500,000)/$500,000 = 10.63%

20. Assume the following bid and ask rates of the pound for two banks as shown below:

Bid Ask

Bank A $1.41 $1.42

Bank B $1.39 $1.40

As locational arbitrage occurs:

A) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.

B) the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.

C) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.

D) the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

ANSWER: D

21. 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.

ANSWER: D

SOLUTION: $1,000,000/$.41 = S2,439,024 x $.42 = $1,024,390

22. 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.

ANSWER: B

23. 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

ANSWER: A

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