FIN 582 Quiz Test Questions with Correct Answers

FIN 582 Quiz Test Questions with Correct Answers Arbitrage involves key elements - Answer-4 Which of the following is not a key element of arbitrage - Answer-Buy when undervalued, wait, sell when overvalued As locational arbitrage occurs (disregard the bid-ask spread), banks running out of inventory of a currency will raise their prices. - Answer-True When the bid-ask spread is considered, locational arbitrage is possible if and only if the very highest ask price is above the very lowest bid price. - Answer-False Triangular arbitrage exists when there is a discrepancy between the direct cross exchange rate and the indirect cross exchange rate. - Answer-True Take the following two exchange rates and compute the INR/EUR cross exchange rate. INR12.15/USD and USD1.13/EUR - Answer-INR 13.7295/EUR If the direct cross exchange rate is given in the form of JPY/EUR, it is recommended that you compute the indirect cross exchange rate in the form of JPY/EUR as well. That way you can immediately determine if there is a triangular arbitrage opportunity. - Answer-True Suppose the direct cross exchange rate is EUR 1.4655/GBP. The indirect cross exchange rate is EUR1.5245/ GBP. Arbitrage profits exist if you buy the GBP indirectly and sell the GBP directly. - Answer-False If there is a triangular arbitrage opportunity, you must start the arbitrage with the currency on the top right of your upside-down triangle and then move around the triangle in 3 transactions. - Answer-False If there is a triangular arbitrage opportunity and you are moving around the upside-down triangle counter-clockwise, you are selling the base currency in direct cross exchange rate. - Answer-True The mechanism by which triangular arbitrage opportunities get eliminated is essentially banks raising or lowering their currency prices in response to their inventories of currencies getting too low or too high. - Answer-True Assume no bid-ask spread. If the direct cross exchange rate is not equal to the indirect cross exchange rate, there is a triangular arbitrage opportunity regardless of what direction you go around the triangle. - Answer-False Take the following exchange rates and compute the indirect €/£ ask price - Answer- 1.242 Take the following exchange rates and compute the indirect €/£ bid price - Answer- 1.226 Triangular arbitrage with the bid-ask spread incorporated. There is a triangular arbitrage opportunity if the lowest direct JPY/MXN ask is less than the highest indirect JPY/MXN bid. - Answer-True Triangular arbitrage with the bid-ask spread incorporated. There is a triangular arbitrage opportunity if the highest direct JPY/MXN bid is greater than the lowest indirect JPY/MXN ask. - Answer-True When computing the highest indirect JPY/MXN bid, you would use the USD/MXN bid and the USD/JPY ask. - Answer-True