International Parity Relationships and Forecasting Foreign Exchange RatesMultiple Choice Questions.doc

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1、Lecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-1 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forw

2、arded, distributed, or posted on a website, in whole or part.Lecture 6(Chapter 6) International Parity Relationships and Forecasting Foreign Exchange RatesMultiple Choice Questions1. An arbitrage is best defined as A. A legal condition imposed by the CFTC. B. The act of simultaneously buying and sel

3、ling 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 above2. Interest Rate Parity (IRP) is best defined

4、 as A. When a government brings its domestic interest rate in line with other major financial markets. B. When the central bank of a country brings its domestic interest rate in line with its major trading partners. C. An arbitrage condition that must hold when international financial markets are in

5、 equilibrium. D. None of the above3. When Interest Rate Parity (IRP) does not hold A. there is usually a high degree of inflation in at least one country. B. the financial markets are in equilibrium. C. there are opportunities for covered interest arbitrage. D. both b) and c)4. Suppose you observe a

6、 spot exchange rate of $1.50/. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate? A. 1.5291/$ B. $1.5291/ C. 1.4714/$ D. $1.4714/Lecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-2 2012 by McGraw-Hi

7、ll Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.5. Suppose you observe a spot exchange rate o

8、f $1.50/. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward rate? A. 1.5291/$ B. $1.5291/ C. 1.4714/$ D. $1.4714/6. Suppose you observe a spot exchange rate of $2.00/. If interest rates are 5% APR in the U.S. and 2% APR in the U.K., what is

9、 the no-arbitrage 1-year forward rate? A. 2.0588/$ B. $2.0588/ C. 1.9429/$ D. $1.9429/7. A formal statement of IRP is A. B. C. D. 8. Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/; and the one-year forward exchange rate is $1.16/. What m

10、ust one-year interest rate be in the euro zone to avoid arbitrage? A. 5.0% B. 6.09% C. 8.62% D. None of the aboveLecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-3 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use.

11、Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.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 for

12、ward exchange rate is $1.18/. What must one-year interest rate be in the United States? A. 1.2833% B. 1.0128% C. 4.75% D. None of the above10. 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

13、 must one-year interest rate be in the United States? A. 2% B. 2.7% C. 5.32% D. None of the above11. Covered Interest Arbitrage (CIA) activities will result in A. an unstable international financial markets. B. restoring equilibrium quite quickly. C. a disintermediation. D. no effect on the market.1

14、2. Suppose that the one-year 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 one-year forward exchange rate, is $1.16/. Assume that an arbitrageur can borrow up to $1,000,000. A. This is an example where interest rate pa

15、rity holds. B. This is an example of an arbitrage opportunity; interest rate parity does NOT hold. C. This is an example of a Purchasing Power Parity violation and an arbitrage opportunity. D. None of the aboveLecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-4 2

16、012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.13. Suppose that you are the

17、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% (thats 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 $

18、1.00 = 110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy? 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

19、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.14. Suppose that the annual interest rate is 2.0 percent i

20、n the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/ and the forward exchange rate, with one- year maturity, is $1.58/. Assume that an arbitrager can borrow up to $1,000,000 or 625,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?

21、A. $238.65 B. $14,000 C. $46,207 D. $7,00015. 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-ye

22、ar forward exchange rate is $1.20 = 1.00. Show how to realize a certain profit via covered interest arbitrage. 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%

23、; 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 i

24、nto euro at the forward rate of $1.20 = 1.00. Net profit 2,000. D. Both c) and b)Lecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-5 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distr

25、ibution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.16. 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 fo

26、rward 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? A. $10,690 B. $15,000 C. $46,207 D. $21,964.2917. A U.S.-based currency dealer has good credit and can borrow

27、 $1,000,000 for one year. The one-year interest rate in the U.S. is i$ = 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 dollar profit via covered interest arbit

28、rage. 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 in

29、to 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)18. An Italian currency

30、dealer has good credit and can borrow 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 euro-d

31、enominated profit via covered interest arbitrage. 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 = $1,017,600. B. Borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the U.S. at i$

32、= 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 2,00

33、0. D. Both c) and b)Lecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-6 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scann

34、ed, duplicated, forwarded, distributed, or posted on a website, in whole or part.19. 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% (thats a six month rate, not an annual rate by the wa

35、y) 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. What must the interest rate in Japan (on an investment of comparable risk) be before you are willing to consider investing there for six months? A. 11.991% B. 1.12% C. 7.45% D. -

36、7.45%20. How high does the lending rate in the euro zone have to be before an arbitrageur would NOT consider borrowing dollars, trading for euro at the spot, investing in the euro zone and hedging with a short position in the forward contract?A. The bid-ask spreads are too wide for any profitable ar

37、bitrage when i 0 B. 3.48% C. -2.09% D. None of the above21. 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? A. $1.1768/ B. $1.1434/ C. $1.12/ D. None of the

38、aboveLecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-7 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,

39、 forwarded, distributed, or posted on a website, in whole or part.22. A higher U.S. interest rate (i$ ) will result in A. a stronger dollar. B. a lower spot exchange rate (expressed as foreign currency per U.S. dollar). C. both a) and b) D. none of the above23. If the interest rate in the U.S. is i$

40、 = 5 percent for the next year and interest rate in the U.K. is i = 8 percent for the next year, uncovered IRP suggests that A. the pound is expected to depreciate against the dollar by about 3 percent. B. the pound is expected to appreciate against the dollar by about 3 percent. C. the dollar is ex

41、pected to appreciate against the pound by about 3 percent. D. both a) and c)24. 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 forwar

42、d exchange rate is $1.20 = 1.00; what must the spot rate be to eliminate arbitrage opportunities? A. $1.2471 = 1.00 B. $1.20 = 1.00 C. $1.1547 = 1.00 D. none of the above25. Will an arbitrageur facing the following prices be able to make money?A. Yes, borrow $1,000 at 5%; Trade for at the ask spot r

43、ate $1.01 = 1.00; Invest 990.10 at 5.5%; Hedge this with a forward contract on 1,044.55 at $0.99 = 1.00; Receive $1.034.11. B. Yes, borrow 1,000 at 6%; Trade for $ at the bid spot rate $1.00 = 1.00; Invest $1,000 at 4.5%; Hedge this with a forward contract on 1,045 at $1.00 = 1.00. C. No; the transa

44、ctions costs are too high. D. None of the aboveLecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-8 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This docume

45、nt may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.26. If IRP fails to hold A. pressure from arbitrageurs should bring exchange rates and interest rates back into line. B. it may fail to hold due to transactions costs. C. it may be due to gove

46、rnment-imposed capital controls. D. all of the above27. Although IRP tends to hold, it may not hold precisely all the time 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)28. Consider a bank

47、dealer who faces the following spot rates and interest rates. What should he set his 1-year forward ask price at?A. $1.4324/ B. $1.4358/ C. $1.4662/ D. $1.4676/Lecture 6 - International Parity Relationships and Forecasting Foreign Exchange Rates6-9 2012 by McGraw-Hill Education. This is proprietary

48、material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.29. Consider a bank dealer who faces the following spot rates and interest rate

49、s. What should he set his 1-year forward bid price at?A. $1.4324/ B. $1.4358/ C. $1.4662/ D. $1.4676/30. Will an arbitrageur facing the following prices be able to make money?A. Yes, borrow 1,000,000 at 3.65%; Trade for $ at the bid spot rate $1.40 = 1.00; Invest at 4.1%; Hedge this with a long position in a forward contract. B. Yes, borrow $1,000,000 at 4.2%;