FIN 582 Chapter 7 Quiz Questions with Correct Answers

FIN 582 Chapter 7 Quiz Questions with Correct Answers Due to ____, market forces should realign the spot rate of a currency among banks. a. covered interest arbitrage b. locational arbitrage c. quadratic arbitrage d. triangular arbitrage - Answer-b. locational arbitrage Assume that the interest rate in the home country of Currency X is much lower than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X a. should exhibit a discount. b. should exhibit a premium. c. should be zero d. the information provided is not sufficient to select any answer. - Answer-b. should exhibit a premium. Assume that interest rate parity does not hold, and Japanese investors are benefiting from covered interest arbitrage due to high interest rates in the U.S. Which of the following forces should result from this covered interest arbitrage activity? a. upward pressure on the U.S. interest rate b. downward pressure on the yen's interest rate c. downward pressure on the yen's spot rate d. downward pressure on the yen's forward rate - Answer-c. downward pressure on the yen's spot rate If U.S. firms attempt to use covered interest arbitrage to capitalize on the high Argentine peso interest rate, what forces should occur? a. Spot rate of peso decreases; forward rate of peso increases. b. Spot rate of peso increases; forward rate of peso increases. c. Spot rate of peso increases; forward rate of peso decreases. d. Spot rate of peso decreases; forward rate of peso decreases - Answer-c. Spot rate of peso increases; forward rate of peso decreases. Assume that interest rate parity exists and will continue to exist. The U.S. interest rate was 4% while the Singapore interest rate was 5% at the beginning of the month. Assume the Singapore interest rate rises while the U.S. interest rate declines over the month. Based on this information, the forward rate of the Singapore dollar exhibited a______ at the beginning of the month, and _______by the end of the month. a. discount; the size of the discount increased b. premium; the size of the premium increased c. discount; discount changed to a premium d. premium; changed to a discount - Answer-a. discount; the size of the discount increased Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP7. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the Mexican peso (MXP) should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____. a. depreciate; depreciate b. depreciate; appreciate c. appreciate; depreciate d. appreciate; appreciate e. remain stable; appreciate - Answer-d. appreciate; appreciate