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In Class Test_CIA PPP IFE IRP

Quiz by Dương Đăng Khoa

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30 questions
Show answers
  • Q1
    Suppose that the one-year interest rate is 4.0 percent in the Italy, the spot exchange rate is $1.60/€, and the one-year forward exchange rate is $1.58/€. What must one-year interest rate be in the United States
    1.70%
    2.70%
    2%
    None of above
    120s
  • Q2
    Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.58/€. Assume that an arbitrager can borrow up to $1,000,000 or €625,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?
    None of above
    $238.65
    $14,000
    $46,207
    30s
  • Q3
    An arbitrage is best defined as
    The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits
    A legal condition imposed by the CFTC
    None of above
    The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits.
    120s
  • Q4
    Covered Interest Arbitrage (CIA) activities will result in
    an unstable international financial markets.
    a disintermediation.
    restoring equilibrium quite quickly.
    no effect on the market.
    120s
  • Q5
    Interest Rate Parity (IRP) is best defined as
    When a government brings its domestic interest rate in line with other major financial markets.
    all of above
    An arbitrage condition that must hold when international financial markets are in equilibrium. Correct
    When the central bank of a country brings its domestic interest rate in line with its major trading partners.
    120s
  • Q6
    Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and the one-year forward exchange rate is $1.16/€. What must the spot exchange rate be
    $1.12/€
    $1.1434/€
    $1.22/€
    $1.1768/€
    120s
  • Q7
    A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?
    $1.15 = €1.00
    $1.1547 = €1.00
    $1.20 = €1.00
    $1.2471 = €1.00
    120s
  • Q8
    If IRP fails to hold
    all of above
    it may fail to hold due to transactions costs.
    it may be due to government-imposed capital controls.
    pressure from arbitrageurs should bring exchange rates and interest rates back into line
    120s
  • Q9
    Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% in the U.S. and 3% in the Euro zone, what is the no-arbitrage 1-year forward rate
    €1.5291/$
    $1.5291/€
    €1.4714/$
    $1.4714/€
    120s
  • Q10
    Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward rate
    €1.4714/$
    €1.5291/$
    None of above
    $1.5291/€
    120s
  • Q11
    Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5% in the U.S. and 2% in the U.K., what is the no-arbitrage 1-year forward rate?
    $2.0588/£
    £2.0588/$
    $1.9429/£
    £1.9429/$
    120s
  • Q12
    Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€. What must one-year interest rate be in the euro zone to avoid arbitrage
    None of the above
    8.62%
    5.00%
    6.09%
    120s
  • Q13
    Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00
    €0.80/£1.00
    $1.25/£1.00
    €1.25/£1.00
    £1.25/€1.00
    120s
  • Q14
    You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make
    $30,000
    $41,667
    $1,160,000
    $40,000
    120s
  • Q15
    Purchasing power parity (PPP) theory provides that
    rates of inflation must be the same everywhere
    None of above
    the cost of a haircut in Columbia, Missouri should be exactly the same as the cost of a haircut in Hong Kong
    the cost of a Big Mac sandwich should be reflected in the cost of two all-beef patties, special sauce, lettuce, cheese, pickles, onions, and a sesame seed bun
    120s

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