FNCE 316 Chapter 7 Exam
Study Guide
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. - ANSWER covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks. -
ANSWER locational arbitrage
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. - ANSWER triangular
arbitrage
If interest rate parity exists, then ____ is not feasible. - ANSWER covered interest
arbitrage
In which case will locational arbitrage most likely be feasible? - ANSWER One bank's bid
price for a currency is greater than another bank's ask price for the currency.
When using ____, funds are not tied up for any length of time. - ANSWER locational
arbitrage AND triangular arbitrage
When using ____, funds are typically tied up for a significant period of time. - ANSWER
covered interest arbitrage
Assume that the interest rate in the home country of Currency X is much higher than the
U.S. interest rate. According to
interest rate parity, the forward rate of Currency X: - ANSWER should exhibit a discount
If the interest rate is lower in the United States than in the United Kingdom, and if the
forward rate of the British
pound is the same as its spot rate: - ANSWER U.S. investors could possibly benefit from
covered interest arbitrage
Assume that U.S. investors are benefiting from covered interest arbitrage due to high
interest rates on euros. Which of
the following forces should result from this covered interest arbitrage activity? -
ANSWER downward pressure on the euro's forward rate
Study Guide
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. - ANSWER covered interest arbitrage
Due to ____, market forces should realign the spot rate of a currency among banks. -
ANSWER locational arbitrage
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. - ANSWER triangular
arbitrage
If interest rate parity exists, then ____ is not feasible. - ANSWER covered interest
arbitrage
In which case will locational arbitrage most likely be feasible? - ANSWER One bank's bid
price for a currency is greater than another bank's ask price for the currency.
When using ____, funds are not tied up for any length of time. - ANSWER locational
arbitrage AND triangular arbitrage
When using ____, funds are typically tied up for a significant period of time. - ANSWER
covered interest arbitrage
Assume that the interest rate in the home country of Currency X is much higher than the
U.S. interest rate. According to
interest rate parity, the forward rate of Currency X: - ANSWER should exhibit a discount
If the interest rate is lower in the United States than in the United Kingdom, and if the
forward rate of the British
pound is the same as its spot rate: - ANSWER U.S. investors could possibly benefit from
covered interest arbitrage
Assume that U.S. investors are benefiting from covered interest arbitrage due to high
interest rates on euros. Which of
the following forces should result from this covered interest arbitrage activity? -
ANSWER downward pressure on the euro's forward rate
