MBA 620 QUESTIONS AND ANSWERS
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: - 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? - Answers -.50
When using ____, funds are typically tied up for a significant period of time. - 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. - Answers -covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks. -
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? - 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 $1,000,000, covered interest arbitrage
would yield a rate of return of ____%. - Answers -12.35
You just received a gift from a friend consisting of 1,000 Thai baht, which you would like
to exchange for Australian dollars (A$). 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? - 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 ____. - Answers -appreciate;
2%
The international Fisher effect (IFE) suggests that: - 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: - 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 ____. - 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 ____%. - Answers -
appreciate; 4.85
Given a home country and a foreign country, purchasing power parity (PPP) suggests
that: - 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: - 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: - Answers -
13.15%.
Which of the following operations benefits from appreciation of the firm's local currency?
- 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
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: - 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? - Answers -.50
When using ____, funds are typically tied up for a significant period of time. - 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. - Answers -covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks. -
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? - 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 $1,000,000, covered interest arbitrage
would yield a rate of return of ____%. - Answers -12.35
You just received a gift from a friend consisting of 1,000 Thai baht, which you would like
to exchange for Australian dollars (A$). 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? - 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 ____. - Answers -appreciate;
2%
The international Fisher effect (IFE) suggests that: - 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: - 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 ____. - 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 ____%. - Answers -
appreciate; 4.85
Given a home country and a foreign country, purchasing power parity (PPP) suggests
that: - 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: - 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: - Answers -
13.15%.
Which of the following operations benefits from appreciation of the firm's local currency?
- 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
