MBA 620 UPDATED ACTUAL Questions
and CORRECT 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: - CORRECT ANSWER✔✔- 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? - CORRECT ANSWER✔✔- .50
When using ____, funds are typically tied up for a significant period of time. - CORRECT
ANSWER✔✔- 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. - CORRECT ANSWER✔✔- covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks. -
CORRECT ANSWER✔✔- 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? -
CORRECT ANSWER✔✔- $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 $1,000,000, covered interest arbitrage would
yield a rate of return of ____%. - CORRECT ANSWER✔✔- 12.35
You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to
exchange for Australian dollars (A$). 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? - CORRECT ANSWER✔✔- 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 ____. - CORRECT ANSWER✔✔- appreciate; 2%
The international Fisher effect (IFE) suggests that: - CORRECT ANSWER✔✔- 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: - CORRECT ANSWER✔✔- 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 ____. - CORRECT ANSWER✔✔- 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 ____%. - CORRECT ANSWER✔✔-
appreciate; 4.85
and CORRECT 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: - CORRECT ANSWER✔✔- 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? - CORRECT ANSWER✔✔- .50
When using ____, funds are typically tied up for a significant period of time. - CORRECT
ANSWER✔✔- 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. - CORRECT ANSWER✔✔- covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks. -
CORRECT ANSWER✔✔- 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? -
CORRECT ANSWER✔✔- $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 $1,000,000, covered interest arbitrage would
yield a rate of return of ____%. - CORRECT ANSWER✔✔- 12.35
You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to
exchange for Australian dollars (A$). 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? - CORRECT ANSWER✔✔- 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 ____. - CORRECT ANSWER✔✔- appreciate; 2%
The international Fisher effect (IFE) suggests that: - CORRECT ANSWER✔✔- 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: - CORRECT ANSWER✔✔- 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 ____. - CORRECT ANSWER✔✔- 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 ____%. - CORRECT ANSWER✔✔-
appreciate; 4.85
