Module * Study Questions Locational Arbitrage. Assume the following information: Bid price of New Zealand dollar Beal Bank $.401 Yardley Bank $.398.
Module * Study Questions
Locational Arbitrage. Assume the following information: Bid price of New Zealand dollar Beal Bank $.401 Yardley Bank $.398. Ask price of New Zealand dollar Beal Bank $.404 Yardley Bank $.400. Given this information, is locational arbitrage possible?
| Yes | ||
| No |
| $2,785 | ||
| $2,500 | ||
| $2,170 |
Changes in Forward Premiums. Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to those last month?
| The interest rate differential is smaller now than it was last month. | ||
| The interest rate differential provides an arbitrage opportunity to USD holders. | ||
| The interest rate differential is higher than it was last month. | ||
| The interest rate differential provides an arbitrage opportunity to euro holders. |
Covered Interest Arbitrage. Assume the following information: Quoted Price: Spot rate of Canadian dollar: $.80. 90 day forward rate of Canadian dollar: $.79. 90 day Canadian interest rate: 4%. 90 day U.S. interest rate: 2.5%. Given this information, assume the investor invests $1,000,000. What is the profit from this covered interest arbitrage?
| $130,000 | ||
| $1,027,000 | ||
| $1,367,000 |
Covered Interest Arbitrage. Assume the following information: Quoted Price: Spot rate of Canadian dollar: $.80. 90 day forward rate of Canadian dollar: $.79. 90 day Canadian interest rate: 4%. 90 day U.S. interest rate: 2.5%. What would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage?
| 2.7% | ||
| 2.1% | ||
| 1.5% |
Covered Interest Arbitrage. Assume the following information: Quoted Price: Spot rate of Canadian dollar: $.80. 90 day forward rate of Canadian dollar: $.79. 90 day Canadian interest rate: 4%. 90 day U.S. interest rate: 2.5%. What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
| Rise, fall | ||
| Fall, rise | ||
| Rise, rise | ||
| Fall, fall |
Covered Interest Arbitrage in Both Directions. Assume that the existing U.S. one year interest rate is 10% and the Canadian one year interest rate is 11%. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium?
| Discount | ||
| Premium |
Interest Rate Parity. Consider investors who invest in either U.S. or British one year Treasury bills. Assume zero transaction costs and no taxes. If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the return for U.S. investors who invest in U.S. Treasury bills. Is this statement true or false?
True
False
Covered Interest Arbitrage in Both Directions. The one year interest rate in New Zealand is 6%. The one year U.S. interest rate is 10%. The spot rate of the New Zealand dollar (NZ$) is $.50. The forward rate of the New Zealand dollar is $.54. What is the yield from covered interest arbitrage for U.S. investors? Is covered interest arbitrage feasible for U.S. investors?
| 14.48%, yes | ||
| 14.48%, no | ||
| 11.79%, yes | ||
| 11.79%, no |
Triangular Arbitrage. Assume the following information: Quoted Price: Value of Canadian dollar in U.S. dollars: $.90. Value of New Zealand dollar in U.S. dollars: $.30. Value of Canadian dollar in New Zealand dollars: NZ$3.02. Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage?
| $8,437 | ||
| $7,589 | ||
| $6,667 | ||
| $5,450 |
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