Assume the following bid and ask rates of the pound for two banks as shown below:
Bank C
Bid - $1.61
Ask - $1.63
Bank D
Bid - $1.58
Ask - $1.60
As locational arbitrage occurs: correct answers the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increas...
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Assume the following bid and ask rates of the pound for two banks as shown below:
Bank C
Bid - $1.61
Ask - $1.63
Bank D
Bid - $1.58
Ask - $1.60
As locational arbitrage occurs: correct answers the bid rate for pounds at Bank C will decrease;
the ask rate for pounds at Bank D will increase.
Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the
value of the Canadian dollar in pounds? correct answers .50
When using ____, funds are typically tied up for a significant period of time. correct answers
covered interest arbitrage
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. correct answers covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks. correct
answers locational arbitrage
Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR).
Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit
for an investor who has $500,000 available to conduct locational arbitrage? correct answers
$1,639
Spot rate today of Swiss franc = $.60
1-year forward rate as of today for Swiss franc = $.63
Expected spot rate 1 year from now = $.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denominated in U.S. dollars = 9%
From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a
rate of return of ____%. correct answers 12.35
You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to
exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are
currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars
should you expect to receive for your baht? correct answers A$39.93
, Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S.
interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect,
the franc will ____ by about ____. correct answers appreciate; 2%
The international Fisher effect (IFE) suggests that: correct answers a home currency will
depreciate if the current home interest rate exceeds the current foreign interest rate.
According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic
inflation over one year, and a 2% rate of inflation in European countries that use the euro, and
require a 3% real return on investments over one year, the nominal interest rate on one-year U.S.
Treasury securities would be: correct answers 8%
Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by
1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S.
interest rate should be ____. correct answers 3.43%
Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%.
According to PPP, the Singapore dollar should ____ by ____%. correct answers appreciate; 4.85
Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
correct answers a home currency will depreciate if the current home inflation rate exceeds the
current foreign inflation rate.
Because there are sometimes no substitutes for traded goods, this will: correct answers reduce
the probability that PPP shall hold.
Consider an MNC that is exposed to the Bulgarian lev (BGL) and the Romanian leu (ROL). 30%
of the MNC's funds are lev and 70% are leu. The standard deviation of exchange movements is
10% for lev and 15% for leu. The correlation coefficient between movements in the value of the
lev and the leu is .85. Based on this information, the standard deviation of this two-currency
portfolio is approximately: correct answers 13.15%.
Which of the following operations benefits from appreciation of the firm's local currency?
correct answers borrowing in a foreign currency and converting the funds to the local currency
prior to the appreciation.
Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in
both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the
funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian
dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of
monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar.
The correlation coefficient between the euro and the Canadian dollar is 0.30. What is the
portfolio standard deviation? correct answers 5.44%
According to the text, currency variability levels ____ perfectly stable over time, and currency
correlations ____ perfectly stable over time. correct answers are not; are not
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