Chapter 7 International Arbitrage and Interest Rate Parity Comprehensive Exam Study Guide Latest Updated 2024/2025

Chapter 7 International Arbitrage
and Interest Rate Parity
Comprehensive Exam Study Guide
Latest Updated 2024/2025

,Chapter 7 International Arbitrage
and Interest Rate Parity
Comprehensive Exam Study Guide
Latest Updated 2024/2025
1. 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.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage
ANS: C PTS: 1

2. Due to , market forces should realign the spot rate of a currency among banks.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage
ANS: D PTS: 1

3. Due to , market forces should realign the cross exchange rate between two foreign currencies
based on the spot exchange rates of the two currencies against the U.S. dollar.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage
ANS: B PTS: 1

4. If interest rate parity exists, then is not feasible.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage
ANS: C PTS: 1

5. In which case will locational arbitrage most likely be feasible?
a. One bank's ask price for a currency is greater than another bank's bid price for the
currency.
b. One bank's bid price for a currency is greater than another bank's ask price for the
currency.
c. One bank's ask price for a currency is less than another bank's ask price for the currency.
d. One bank's bid price for a currency is less than another bank's bid price for the currency.
ANS: B PTS: 1




year?

, Chapter 7 International Arbitrage
and Interest Rate Parity
Comprehensive Exam Study Guide
Latest Updated 2024/2025
6. When using , funds are not tied up for any length of time.
a. covered interest arbitrage
b. locational arbitrage
c. triangular arbitrage
d. B and C
ANS: D PTS: 1

7. When using , funds are typically tied up for a significant period of time.
a. covered interest arbitrage
b. locational arbitrage
c. triangular arbitrage
d. B and C
ANS: A PTS: 1

8. Assume that the interest rate in the home country of Currency X is a much higher interest rate 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 (i.e., it should equal its spot rate).
d. B or C
ANS: A PTS: 1

9. If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the
British pound (in U.S. dollars) is the same as the pound's spot rate, then:
a. U.S. investors could possibly benefit from covered interest arbitrage.
b. British investors could possibly benefit from covered interest arbitrage.
c. neither U.S. nor British investors could benefit from covered interest arbitrage.
d. A and B
ANS: B PTS: 1

10. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the
British pound is the same as its spot rate:
a. U.S. investors could possibly benefit from covered interest arbitrage.
b. British investors could possibly benefit from covered interest arbitrage.
c. neither U.S. nor British investors could benefit from covered interest arbitrage.
d. A and B
ANS: A PTS: 1

11. Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates
on euros. Which of the following forces should result from the act of this covered interest arbitrage?
a. downward pressure on the euro's spot rate.
b. downward pressure on the euro's forward rate.
c. downward pressure on the U.S. interest rate.
d. upward pressure on the euro's interest rate.
ANS: B PTS: 1



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