Corporate finance chapter 21 Questions
and Answers Grade A+ 2023
triangle arbitrage - -the act of exchanging through three currencies to exploit a mispriced trio of
currency quotes
-spot trade - -exchange currency immediately
-spot rate - -the exchange rate for an immediate trade
-forward trade - -agree today to exchange currency at some future date and some specified price
-forward rate - -the exchange rate specified in the forward contract
-if the forward rate is higher than the spot rate the foreign currency is what? - -selling at a
premium ( when quoted as $ equivalents)
-If the forward rate is lower than the spot rate the foreign currency is what? - -selling at a
discount
-absolute purchasing power parity - -Price of an item should be the same in real terms, regardless
of the currency used to purchase it
-what are the requirements of absolute purchasing power parity - -no transaction costs
no barriers to trade
no difference in the commodity between locations
-relative purchasing power parity - -provides info about what causes changes in exchange rates
-covered interest arbitrage - -Examines the relationship between spot rates, forward rates, and
nominal rates between countries
-current forward rate is an unbiased estimate of what? - -the future spot exchange rate
-international fisher effect - -tells us that the real rate of return must be constant across countries
-America Depository Receipt - -a security issued in the US that represents shares of a foreign
stock, allowing that stock to be traded in the US foreign companies use ADR which are available
in two forms
-cross rate - -the implicit exchange rate between two currencies quoted in some third currency
( US dollars)
and Answers Grade A+ 2023
triangle arbitrage - -the act of exchanging through three currencies to exploit a mispriced trio of
currency quotes
-spot trade - -exchange currency immediately
-spot rate - -the exchange rate for an immediate trade
-forward trade - -agree today to exchange currency at some future date and some specified price
-forward rate - -the exchange rate specified in the forward contract
-if the forward rate is higher than the spot rate the foreign currency is what? - -selling at a
premium ( when quoted as $ equivalents)
-If the forward rate is lower than the spot rate the foreign currency is what? - -selling at a
discount
-absolute purchasing power parity - -Price of an item should be the same in real terms, regardless
of the currency used to purchase it
-what are the requirements of absolute purchasing power parity - -no transaction costs
no barriers to trade
no difference in the commodity between locations
-relative purchasing power parity - -provides info about what causes changes in exchange rates
-covered interest arbitrage - -Examines the relationship between spot rates, forward rates, and
nominal rates between countries
-current forward rate is an unbiased estimate of what? - -the future spot exchange rate
-international fisher effect - -tells us that the real rate of return must be constant across countries
-America Depository Receipt - -a security issued in the US that represents shares of a foreign
stock, allowing that stock to be traded in the US foreign companies use ADR which are available
in two forms
-cross rate - -the implicit exchange rate between two currencies quoted in some third currency
( US dollars)
