FIN 340 Exam 2 UPDATED Exam
Questions and CORRECT Answers
Which of the Following is used for calculating forward rate for $ / Pound?
a) Spot Rate for $/f
b) U.S interest rates
c) U.K. interest rates
d) All - CORRECT ANSWER - d) All
f = foreign, d = domestic.
Ff/d = Forward exchange rate, St/d = Spot exchange rate, id = Domestic interest rate,
if = Foreign interest rate
If, Ff/d = St/d x [ (1+ i+) / (1+ ia)] then which of the following is correct?
A You must invest in the domestic market
B You must invest in the foreign market
C In this case, IRP holds and therefore there is no arbitrage condition
D None - CORRECT ANSWER - C In this case, IRP holds and therefore there is no
arbitrage condition
e = change in exchange rate ($/E), MusA = inflation rate in USA, Tuk= inflation rate in U.K
If, (1+e) = (1+ MUsA) / (1+ Muk) then which of the following is correct?
a) $ is overvalued
b) $ is undervalued
c) None
d) In this case, PPP holds and therefore there is no overvaluation or undervaluation of S -
CORRECT ANSWER - D In this case, PPP holds and therefore there is no overvaluation
or undervaluation of S
, You may invest your money either in Argentina at 4% or in Brazil at 2%. If the forward
premium is
1.5%, then which of the following is correct?
a) You must invest in Argentina
b) You must invest in Brazil
c) Investments in Brazil and Argentina will have the same return
d) None - CORRECT ANSWER - a) You must invest in Argentina
(SF: Swiss Frank)
sF rate = 1•2
Spot exchange rate for S/SFis12 US int Rate 20.02 SWISS rate 20.04
US interest rate is 2% whereas the Swiss interest rate is 4%. What is the 30 day forward S/SF
exchange rate?
a) 1.2963
b) 1.1976
c) 2.200
d) 0.55 - CORRECT ANSWER - b) 1.1976
The spot exchange rate for $ / CAD is 0.75 the interest rates in US is 0.4% whereas the interest
rates in Canada is 0.2% this means that the forard rate for $/ CAD will be higher than 0.7
True or False? - CORRECT ANSWER - True
Covered Interest Arbitrage brings the market into equilibrium and therefore enables the IRP to
hold in the long run
Questions and CORRECT Answers
Which of the Following is used for calculating forward rate for $ / Pound?
a) Spot Rate for $/f
b) U.S interest rates
c) U.K. interest rates
d) All - CORRECT ANSWER - d) All
f = foreign, d = domestic.
Ff/d = Forward exchange rate, St/d = Spot exchange rate, id = Domestic interest rate,
if = Foreign interest rate
If, Ff/d = St/d x [ (1+ i+) / (1+ ia)] then which of the following is correct?
A You must invest in the domestic market
B You must invest in the foreign market
C In this case, IRP holds and therefore there is no arbitrage condition
D None - CORRECT ANSWER - C In this case, IRP holds and therefore there is no
arbitrage condition
e = change in exchange rate ($/E), MusA = inflation rate in USA, Tuk= inflation rate in U.K
If, (1+e) = (1+ MUsA) / (1+ Muk) then which of the following is correct?
a) $ is overvalued
b) $ is undervalued
c) None
d) In this case, PPP holds and therefore there is no overvaluation or undervaluation of S -
CORRECT ANSWER - D In this case, PPP holds and therefore there is no overvaluation
or undervaluation of S
, You may invest your money either in Argentina at 4% or in Brazil at 2%. If the forward
premium is
1.5%, then which of the following is correct?
a) You must invest in Argentina
b) You must invest in Brazil
c) Investments in Brazil and Argentina will have the same return
d) None - CORRECT ANSWER - a) You must invest in Argentina
(SF: Swiss Frank)
sF rate = 1•2
Spot exchange rate for S/SFis12 US int Rate 20.02 SWISS rate 20.04
US interest rate is 2% whereas the Swiss interest rate is 4%. What is the 30 day forward S/SF
exchange rate?
a) 1.2963
b) 1.1976
c) 2.200
d) 0.55 - CORRECT ANSWER - b) 1.1976
The spot exchange rate for $ / CAD is 0.75 the interest rates in US is 0.4% whereas the interest
rates in Canada is 0.2% this means that the forard rate for $/ CAD will be higher than 0.7
True or False? - CORRECT ANSWER - True
Covered Interest Arbitrage brings the market into equilibrium and therefore enables the IRP to
hold in the long run
