IFM CHAPTER 6 LATEST QUESTIONS AND VERIFIED ANSWERS
An arbitrage is best defined as
A. A legal condition imposed by the CFTC.
B. The act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making reasonable profits.
C. The act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making guaranteed profits.
D. None of the above - CORRECT ANSWER✅✅✅C. The act of simultaneously buying and selling the
same or equivalent assets or commodities
Interest Rate Parity (IRP) is best defined as
A. When a government brings its domestic interest rate in line with other major financial markets.
B. When the central bank of a country brings its domestic interest rate in line with its major
trading partners.
C. An arbitrage condition that must hold when international financial markets are in equilibrium.
D. None of the above - CORRECT ANSWER✅✅✅C. An arbitrage condition that must hold when
international financial markets are in equilibrium.
When Interest Rate Parity (IRP) does not hold
A. there is usually a high degree of inflation in at least one country.
B. the financial markets are in equilibrium.
C. there are opportunities for covered interest arbitrage.
D. both b) and c) - CORRECT ANSWER✅✅✅C. there are opportunities for covered interest arbitrage.
Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3%
APR in the euro zone, what is the no-arbitrage 1-year forward rate?
A. €1.5291/$
B. $1.5291/€
C. €1.4714/$
D. $1.4714/€ - CORRECT ANSWER✅✅✅B. $1.5291/€
, Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is
$1.20/€; and the one-year forward exchange rate is $1.16/€. What must one-year interest rate be in the
euro zone to avoid arbitrage?
A. 5.0%
B. 6.09%
C. 8.62%
D. None of the above - CORRECT ANSWER✅✅✅C. 8.62%
Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/€, and
the one-year forward exchange rate is $1.18/€. What must one-year interest rate be in the United
States?
A. 1.2833%
B. 1.0128%
C. 4.75%
D. None of the above - CORRECT ANSWER✅✅✅A. 1.2833%
Covered Interest Arbitrage (CIA) activities will result in
A. an unstable international financial markets.
B. restoring equilibrium quite quickly.
C. a disintermediation.
D. no effect on the market - CORRECT ANSWER✅✅✅B. restoring equilibrium quite quickly.
Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,
and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume
that an arbitrageur can borrow up to $1,000,000.
A. This is an example where interest rate parity holds.
B. This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C. This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D. None of the above - CORRECT ANSWER✅✅✅B. This is an example of an arbitrage opportunity;
interest rate parity does NOT hold.
An arbitrage is best defined as
A. A legal condition imposed by the CFTC.
B. The act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making reasonable profits.
C. The act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making guaranteed profits.
D. None of the above - CORRECT ANSWER✅✅✅C. The act of simultaneously buying and selling the
same or equivalent assets or commodities
Interest Rate Parity (IRP) is best defined as
A. When a government brings its domestic interest rate in line with other major financial markets.
B. When the central bank of a country brings its domestic interest rate in line with its major
trading partners.
C. An arbitrage condition that must hold when international financial markets are in equilibrium.
D. None of the above - CORRECT ANSWER✅✅✅C. An arbitrage condition that must hold when
international financial markets are in equilibrium.
When Interest Rate Parity (IRP) does not hold
A. there is usually a high degree of inflation in at least one country.
B. the financial markets are in equilibrium.
C. there are opportunities for covered interest arbitrage.
D. both b) and c) - CORRECT ANSWER✅✅✅C. there are opportunities for covered interest arbitrage.
Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3%
APR in the euro zone, what is the no-arbitrage 1-year forward rate?
A. €1.5291/$
B. $1.5291/€
C. €1.4714/$
D. $1.4714/€ - CORRECT ANSWER✅✅✅B. $1.5291/€
, Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is
$1.20/€; and the one-year forward exchange rate is $1.16/€. What must one-year interest rate be in the
euro zone to avoid arbitrage?
A. 5.0%
B. 6.09%
C. 8.62%
D. None of the above - CORRECT ANSWER✅✅✅C. 8.62%
Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/€, and
the one-year forward exchange rate is $1.18/€. What must one-year interest rate be in the United
States?
A. 1.2833%
B. 1.0128%
C. 4.75%
D. None of the above - CORRECT ANSWER✅✅✅A. 1.2833%
Covered Interest Arbitrage (CIA) activities will result in
A. an unstable international financial markets.
B. restoring equilibrium quite quickly.
C. a disintermediation.
D. no effect on the market - CORRECT ANSWER✅✅✅B. restoring equilibrium quite quickly.
Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,
and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume
that an arbitrageur can borrow up to $1,000,000.
A. This is an example where interest rate parity holds.
B. This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C. This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D. None of the above - CORRECT ANSWER✅✅✅B. This is an example of an arbitrage opportunity;
interest rate parity does NOT hold.
