Homework Study Questions Module#8
Homework Study Questions Module#8
Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:
| British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S. | ||
| U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S. | ||
| U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S. | ||
| U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S |
Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?
| upward pressure on the Swiss franc’s spot rate. | ||
| upward pressure on the U.S. interest rate. | ||
| downward pressure on the Swiss interest rate. | ||
| upward pressure on the Swiss franc’s forward rate. |
Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
| $15,385. | ||
| $15,625. | ||
| $22,136. | ||
| $31,250. |
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.
| forward realignment arbitrage | ||
| triangular arbitrage | ||
| covered interest arbitrage | ||
| locational arbitrage |
When using ____, funds are not tied up for any length of time.
| covered interest arbitrage | ||
| locational arbitrage | ||
| triangular arbitrage | ||
| B and C |
If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
| U.S. investors could possibly benefit from covered interest arbitrage. | ||
| British investors could possibly benefit from covered interest arbitrage. | ||
| neither U.S. nor British investors could benefit from covered interest arbitrage. | ||
| A and B |
A firm’s cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.
| debt | ||
| retained earnings | ||
| short-term loans | ||
| none of the above |
According to your text, which of the following is not a factor that increases an MNC’s cost of capital?
| higher exposure to exchange rate risk. | ||
| higher exposure to country risk. | ||
| an increase in the risk-free interest rate. | ||
| an increase in the size of the MNC. |
Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?
| spot rate of peso increases; forward rate of peso decreases. | ||
| spot rate of peso decreases; forward rate of peso increases. | ||
| spot rate of peso decreases; forward rate of peso decreases. | ||
| spot rate of peso increases; forward rate of peso increases. |
Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars = 12%. 1-year deposit rate offered on Singapore dollars = 10%. 1-year forward rate of Singapore dollars = $.412. Spot rate of Singapore dollar = $.400. Given this information which is true?
| interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. | ||
| interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. | ||
| interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. | ||
| interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. |
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