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