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Chapter 7

International Arbitrage and Interest Rate Parity
1. 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. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage ANSWER: C 2. Due to _______, market forces should realign the spot rate of a currency among banks. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage ANSWER: D 3. 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. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage ANSWER: B 4. If interest rate parity exists, then _______ is not feasible. A) forward realignment arbitrage B) triangular arbitrage C) covered interest arbitrage D) locational arbitrage ANSWER: C 5. In which case will locational arbitrage most likely be feasible? A) One bank’s ask price for a currency is greater than another bank’s bid price for the currency. B) One bank’s bid price for a currency is greater than another bank’s ask price for the currency. C) One bank’s ask price for a currency is less than another bank’s ask price for the currency. D) One bank’s bid price for a currency is less than another bank’s bid price for the currency. ANSWER: B

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interest rate. than in the United Kingdom.S. B) should exhibit a premium. According to interest rate parity. D) U. ANSWER: A . D) should exhibit a premium or should be zero. D) U. investors could possibly benefit from covered interest arbitrage. C) neither U.S.e. B) British investors could possibly benefit from covered interest arbitrage.S. then: A) U. When using _______. and British investors could possibly benefit from covered interest arbitrage. funds are not tied up for any length of time. and British investors could possibly benefit from covered interest arbitrage. investors could possibly benefit from covered interest arbitrage. C) should be zero (i. nor British investors could benefit from covered interest arbitrage. nor British investors could benefit from covered interest arbitrage. C) neither U. and if the forward rate of the British pound is the same as its spot rate: A) U.S.S. than in the United Kingdom. A) covered interest arbitrage B) locational arbitrage C) triangular arbitrage D) locational arbitrage or triangular arbitrage ANSWER: D 7. A) covered interest arbitrage B) locational arbitrage C) triangular arbitrage D) locational arbitrage or triangular arbitrage ANSWER: A 8..204 International Financial Management 6. When using _______.S. the forward rate of Currency X: A) should exhibit a discount. dollars) is the same as the pound’s spot rate. If the interest rate is higher in the U.S. it should equal its spot rate).S. funds are typically tied up for a significant period of time. ANSWER: A 9.S. If the interest rate is lower in the U. Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U. ANSWER: B 10. and if the forward rate of the British pound (in U. B) British investors could possibly benefit from covered interest arbitrage.S.

S. If U.000. Which of the following forces should result from the act of this covered interest arbitrage? A) downward pressure on the euro’s spot rate.015. ANSWER: D 13. C) $22. interest rate.33 while the ask rate is $. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.385. ANSWER: A SOLUTION: $1. firm can invest funds for one year in the U. interest rate. C) downward pressure on the Swiss interest rate. Given this information. forward rate of peso increases.32 while the ask rate is $. ANSWER: A 14. D) $31.33 = $1. . ANSWER: B 12.10 while the one-year forward rate of the peso is $.625.S. at 12% or invest funds in Mexico at 14%.923 × $.335 at Bank X.000/$. B) spot rate of peso decreases.136.076.S.S. C) downward pressure on the U. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Assume that a U. Assume the bid rate of a New Zealand dollar is $. Which of the following forces results from the act of this covered interest arbitrage? A) upward pressure on the Swiss franc’s spot rate. interest rate. forward rate of peso decreases.S. forward rate of peso increases. Thus. what would be your gain if you use $1. C) spot rate of peso decreases. Assume that the U. D) spot rate of peso increases.10. the profit is $15. B) $15. forward rate of peso decreases. Assume the bid rate of the New Zealand dollar is $. D) upward pressure on the Swiss franc’s forward rate. what forces should occur? A) spot rate of peso increases. firms attempt to use covered interest arbitrage. B) downward pressure on the euro’s forward rate.325 = NZ$3.Chapter 7: International Arbitrage and Interest Rate Parity 205 11.000. B) upward pressure on the U.S.385. The spot rate of the peso is $.385.250.000 you started with? A) $15. D) upward pressure on the euro’s interest rate.000 and execute locational arbitrage? That is. how much will you end up with over and above the $1.000.S.325 at Bank Y.

then: A) British investors who invest in the United Kingdom will achieve the same return as U.000.30 = $1.000 pounds × 1. Assume the following information: You have $1. B) U.S. ANSWER: A 16. investors will earn 15% whether they use covered interest arbitrage or invest in the U.28 = $1. ANSWER: D .04) = 800.S. 3-month deposit rate in Great Britain = $1.000 17.000 to invest Current spot rate of pound 90-day forward rate of pound 3-month deposit rate in U.30 = 769.S. If interest rate parity exists.000. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U. Assume that the U.000/$1.000. while the British interest rate is 15%.024. the larger the degree by which the foreign interest rate exceeds the U. C) smaller will be the forward premium of the foreign currency. D) U.S. D) $1. interest rate.000. dollars you will have after 90 days? A) $1.S.S.000.040.S.034.206 International Financial Management 15. B) $1.S.024. C) U. B) larger will be the forward premium of the foreign currency. what will be the amount of U. Based on interest rate parity.S. C) $1.231 pounds × (1.030.000.S. E) none of these.S. interest rate is 10%. investors who invest in the U.S. ANSWER: A SOLUTION: $1. D) smaller will be the forward discount of the foreign currency.28 = 3% = 4% If you use covered interest arbitrage for a 90-day investment. the: A) larger will be the forward discount of the foreign currency. investors will earn 10% whether they use covered interest arbitrage or invest in the U.

000 = 10.400 = S$2.S.000.1) = S$2.000/$.133. dollars 1-year deposit rate offered on Singapore dollars 1-year forward rate of Singapore dollars Spot rate of Singapore dollar = 12% = 10% = $.63 ANSWER: E SOLUTION: $500. ANSWER: B SOLUTION: $1.073 × .000 Yield = ($1.000.Chapter 7: International Arbitrage and Interest Rate Parity 18. investors results in a yield above what is possible domestically.171 – $500.S. 19.000.S.63 C) 11.S.000 × $.000)/$500.317.000)/$1.171 Yield = ($553. investors have $1. investors results in a yield above what is possible domestically.41 = $.000 × (1.000 to invest is about _______%.412 = $1.43 = $.41 = NZ$1. C) interest rate parity exists and covered interest arbitrage by U. Assume the following information: U.750.000 to invest 1-year deposit rate offered on U.97 B) 9.512 × (1.000 = 13.12 D) 11.08) = NZ$1.42 = 8% = 9% Given the information in this question.133.S. D) interest rate parity doesn’t exist and covered interest arbitrage by U. A) 11.63% .219.000 – $1. Assume the following information: Current spot rate of New Zealand dollar Forecasted spot rate of New Zealand dollar 1 year from now One-year forward rate of the New Zealand dollar Annual interest rate on New Zealand dollars Annual interest rate on U. investors with $500. B) interest rate parity doesn’t exist and covered interest arbitrage by U.S.000.412 = $.64 E) 10.000/$.400 207 Given this information: A) interest rate parity exists and covered interest arbitrage by U.42 = $553. dollars = $. the return from covered interest arbitrage by U.S.S.500. investors results in a yield below what is possible domestically.3% This yield exceeds what is possible domestically. investors results in the same yield as investing domestically.

41 at Bank X.390.585. D) $24.41 $1.40 As locational arbitrage occurs: A) the bid rate for pounds at Bank A will increase.42 $1.39 Ask $1.000 and execute locational arbitrage? That is.219. E) $18. C) $36. how much will you end up with over and above the $1.439. ANSWER: D SOLUTION: $1. ANSWER: D 21. Based on interest rate parity. B) the bid rate for pounds at Bank A will increase. C) the bid rate for pounds at Bank A will decrease.41 = S2.764.000/$. Given this information. Assume the following bid and ask rates of the pound for two banks as shown below: Bank A Bank B Bid $1.024.425 at Bank Z.000. the ask rate for pounds at Bank B will increase. the ask rate for pounds at Bank B will decrease.S. interest rate exceeds the foreign interest rate. Assume the bid rate of a Singapore dollar is $. the ask rate for pounds at Bank B will increase. D) smaller will be the forward discount of the foreign currency.964. B) larger will be the forward premium of the foreign currency. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $. the larger the degree by which the U.42 = $1. D) the bid rate for pounds at Bank A will decrease. C) smaller will be the forward premium of the foreign currency.000 you started with? A) $11.40 while the ask rate is $.000. the: A) larger will be the forward discount of the foreign currency. B) –$11.024 × $. the ask rate for pounds at Bank B will decrease. ANSWER: B .390 22.000.208 International Financial Management 20. what would be your gain if you use $1.

07) = SF1.S.333 × $. as you and others perform triangular arbitrage.000.22 ANSWER: B SOLUTION: $1.000.50 D) 14. A) appreciate. dollar should _______.13 E) 11.783.S. and the exchange rate of the Mexican peso (MXP) with respect to the U. depreciate B) depreciate.000)/$1.00 B) 12.64 7% 9% From the perspective of U.63 = $1. dollar should _______.500 Yield = ($1. and $1 = MXP5.60 = SF1.500 – $1.35 C) 15. Assume the following exchange rates: $1 = NZ$3.63 $. dollars = = = = = $.000. Given this information.S. depreciate D) appreciate.667 × (1.60 $.S.666. A) 5.123. appreciate E) remain stable. appreciate ANSWER: A 24. covered interest arbitrage would yield a rate of return of _______%.000. appreciate C) depreciate. investors with $1. Assume the following information: Spot rate today of Swiss franc 1-year forward rate as of today for Swiss franc Expected spot rate 1 year from now Rate on 1-year deposits denominated in Swiss francs Rate on 1-year deposits denominated in U. the exchange rate of the New Zealand dollar (NZ) with respect to the U.000.000/$.000 = 12.Chapter 7: International Arbitrage and Interest Rate Parity 209 23. NZ$1 = MXP2.35% .123.

S. D) The Singapore dollar value in U. Assume the British pound is worth $1. ANSWER: D .S. C) The Singapore dollar value in U. Assume that the euro’s interest rates are higher than U. should depreciate. $ Exchange rate of pound in Singapore dollars = $.50 should dollars dollars dollars dollars Based on the information given. as you and others perform triangular arbitrage. and the Canadian dollar is worth $.60 = 0. the pound value in U. C) . E) none of these. dollars should appreciate.50 = S$4.32 = $1.80. should appreciate. ANSWER: D SOLUTION: $. C) Americans who invest in the U.S.210 International Financial Management 25.50 27.S. and the pound value in Singapore dollars should appreciate. what logically happen to the spot exchange rates? A) The Singapore dollar value in U. B) The Singapore dollar value in U. ANSWER: D 26.S. and that interest rate parity exists. the pound value in U.40.0. B) 2.50.S. earn the same rate of return as Germans who attempt covered interest arbitrage. the pound value in U. What is the value of the Canadian dollar in pounds? A) 2. and the pound value in Singapore dollars should depreciate.80.S.S. D) . Which of the following is true? A) Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage. B) Americans who invest in the U. dollars should depreciate. the pound value in U. and the pound value in Singapore dollars should appreciate.S. dollars should appreciate. interest rates. $ Exchange rate of pound in U. should appreciate.S.S. and the pound value in Singapore dollars should depreciate. dollars should depreciate. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.60.S. should appreciate.S.80/$1. earn the same rate of return as Germans who invest in Germany D) None of these are true.

Covered interest arbitrage puts _______ pressure on the pound’s spot rate. decrease C) premium.000 you started with? A) $7. the euro’s forward _______ will _______ in order to maintain interest rate parity.067. increase B) discount.Chapter 7: International Arbitrage and Interest Rate Parity 211 28.579 at Bank X.556.000 and execute locational arbitrage? That is. Given this information: A) Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland.S. Assume that interest rate parity holds. and that the spot rate equals the forward rate. what would be your gain if you use $1.57 while the ask rate is $.238.566 at Bank Y. upward C) upward.000. and the forward rate of the Swiss franc has a 4% premium.114.000/$. Assume that British interest rates are higher than U.S. increase D) premium.560 while the ask rate is $. Given this information.766. Assume the bid rate of the Swiss franc is $.57 = $1. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U. interest rate is 12%. downward D) upward.067. Thus. interest rate is 2% higher than the Swiss rate. rates. ANSWER: B 29. downward B) downward.067. decrease ANSWER: D 31. Assume the U.784 × $. As a result of the increase in the interest rate on euros. D) None of these.S. Then the euro’s interest rate increases to 11% while the U.007. C) $10. C) Both of these.566 = SF1. . Assume the bid rate of a Swiss franc is $. and _______ pressure on the pound’s forward rate. the profit is $7. upward ANSWER: C 30. B) U. B) $8.000. how much will you end up with over and above the $1.S. interest rate remains the same. ANSWER: A SOLUTION: $1.S.S.000. and the euro’s interest rate is 9% while the U. D) $12. A) downward. A) discount.

= $1.000 to invest Current spot rate of pound 90-day forward rate of pound 3-month deposit rate in U. dollars you will have after 90 days? A) $1.833.60 Given this information: A) interest rate parity exists and covered interest arbitrage by U.667 × (1.57 = $1.230.020.S.000. Assume the following information: You have $1.020.045.250.000)/$1.500.136.667 – $1. C) interest rate parity exists and covered interest arbitrage by U. banks 1-year deposit rate offered on Swiss francs 1-year forward rate of Swiss francs Spot rate of Swiss franc = = = = 12% 10% $.62 = $1.333 × $.000. investors have $1. D) $1.000.S.000.000 to invest 1-year deposit rate offered by U.S.60 = SF1. ANSWER: B SOLUTION: $1. ANSWER: A SOLUTION: $1.330. .000/$.666.136.000/$1.212 32.S.S.667 Yield = ($1. investors results in a yield above what is possible domestically. C) $1.S.60 = 625.62 $.094. D) interest rate parity doesn’t exist and covered interest arbitrage by U.500 33. investors results in the same yield as investing domestically.S.1) = SF1.116. 3-month deposit rate in U.K.000. B) $1.600.7% This yield exceeds what is possible domestically.000 = 13.073.57 = 3% = 4% International Financial Management If you use covered interest arbitrage for a 90-day investment. investors results in a yield below what is possible domestically.000.S. what will be the amount of U.04) = 650. investors results in a yield above what is possible domestically. B) interest rate parity doesn’t exist and covered interest arbitrage by U.60 = $1.000 pounds × 1. Assume the following information: U. E) $1.000 pounds × (1.

61 $1.969 Yield = ($527.60 As locational arbitrage occurs: A) the bid rate for pounds at Bank C will increase. the ask rate for pounds at Bank D will decrease.64 $. C) the bid rate for pounds at Bank C will decrease.S.59 ANSWER: E SOLUTION: $500.000 to invest is about _______%. the ask rate for pounds at Bank D will increase.000)/$500.14 E) 5.59 $.250 × (1.58 Ask $1.563 × $. ANSWER: D .00 C) 7.Chapter 7: International Arbitrage and Interest Rate Parity 34. Assume the following bid and ask rates of the pound for two banks as shown below: Bank C Bank D Bid $1.00 B) 9.33 D) 8. the return from covered interest arbitrage by U.000 = 5. B) the bid rate for pounds at Bank C will increase.62 = $527.63 $1.09) = A$851. D) the bid rate for pounds at Bank C will decrease.59% 35.62 9% 6% 213 Given the information in this question.64 = A$781.S.969 – $500. A) 6. = = = = = $.000/$. the ask rate for pounds at Bank D will decrease. Assume the following information: Current spot rate of Australian dollar Forecasted spot rate of Australian dollar 1 year from now 1-year forward rate of Australian dollar Annual interest rate for Australian dollar deposit Annual interest rate in the U. the ask rate for pounds at Bank D will increase. investors with $500.

. the pound value in U. Bank B quotes a bid rate of $.62 = $1.393.S. D) $16.62 while the ask rate is $.393. the profit is $16.S. Thus. Bank A quotes a bid rate of $.639. $ Exchange rate of pound in Singapore dollars = $.804. Assume the bid rate of an Australian dollar is $. dollars should appreciate.S.61 = A$1. should appreciate. ANSWER: B 38.000 you started with? A) $10. ANSWER: D SOLUTION: $500. ANSWER: D SOLUTION: $1. and the pound value in Singapore dollars should depreciate. should appreciate.639.S. E) $18.625 at Bank V. 37.S.S.041. dollars should depreciate. and the pound value in Singapore dollars should appreciate. and the pound value in Singapore dollars should appreciate.310 for the ringgit.50 = S$2.000 and execute locational arbitrage? That is.000.300 and an ask rate of $.393. dollars should depreciate.306 and an ask rate of $.60 while the ask rate is $.6 should dollars dollars dollars dollars Based on the information given. the pound value in U. C) $500. dollars should appreciate.S. as you and others perform triangular arbitrage. B) $9.667.60 = $1. what would be your gain if you use $1.306 = $501. how much will you end up with over and above the $1. $ Exchange rate of pound in U.003.000 available to conduct locational arbitrage? A) $2. the pound value in U. B) $12.639. D) $1.000/$. and the pound value in Singapore dollars should depreciate.305 for the Malaysian ringgit (MYR). Given this information.639.S. the profit is $1.S.S. C) $14.344 × $. What will be the profit for an investor who has $500.016.441. B) The Singapore dollar value in U. what logically happen to the spot exchange rates? A) The Singapore dollar value in U. Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.000/$.344 × $.305 = MYR1.214 International Financial Management 36. C) The Singapore dollar value in U. Thus. the pound value in U.219.000. Assume the bid rate of an Australian dollar is $.063. should depreciate. D) The Singapore dollar value in U. should appreciate.61 at Bank Q.639.000.

Chapter 7: International Arbitrage and Interest Rate Parity 215 39.88 × $. C) A$553. which you would like to exchange for Australian dollars (A$).023/$. B) buying Singapore dollars from a bank (quoted at $.95 = NZ$18. D) converting funds to a foreign currency and investing the funds overseas.62 $.023.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.20. What is your profit from implementing this strategy? A) $77. which is higher than the former bank’s ask. Thus.00 when the spot rate for the rand is $.43.000 Thai baht. C) buying Singapore dollars from a bank (quoted at $.576 × THB1.93. You just received a gift from a friend consisting of 1.96 Assume you have $10.50 when the spot rate for the rand is $.95 Quoted Ask Price $1.015.00. ANSWER: C SOLUTION: $10. D) none of these. B) A$25.84 × 2. National Bank quotes the following for the British pound and the New Zealand dollar: Value of a British pound (£) in $ Value of a New Zealand dollar (NZ$) in $ Value of a British pound in New Zealand dollars Quoted Bid Price $1. Which of the following is an example of triangular arbitrage initiation? A) buying a currency at one bank’s ask and selling at another bank’s bid. ANSWER: A SOLUTION: $.93. B) $197.43.61 $.576.64.80. ANSWER: C 40.043.62 = £6.56 NZ$2. while quotes for the Australian dollar are $. 41.000 to conduct triangular arbitrage. . D) $111.53.20.43.55 NZ$2.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.55 = $10. the profit is $15.172.48.209. How many Australian dollars should you expect to receive for your baht? A) A$39.000/$1. C) $15. You observe that exchange rate quotes for the baht are currently $.000 = A$39.

B) $416.000.86. C) $424.000.00570 = $.451.068. D) $31.S. 90-day interest rate in Sudan = $. what is the dollar profit you will have realized after 180 days? A) $56.042) = SDD73.77 . what amount will you have after 90 days? A) $416.903.000/$.612 × (1.807.64 3. Assume the following information: You have $400.62 $.0% International Financial Management If you conduct covered interest arbitrage.03) = A$1. ANSWER: A SOLUTION: $900. C) $27. B) $61.903. E) none of these.02 × $.000 to invest Current spot rate of Australian dollar (A$) 180-day forward rate of the Australian dollar 180-day interest rate in the U.64 = $956.S.495. Assume the following information: You have $900.500. the profit is $56.0057 = SDD70.00.000 to invest Current spot rate of Sudanese dinar (SDD) 90-day forward rate of the dinar 90-day interest rate in the U. 43.548. Thus.122. D) $416.175.242.161 × $.60 × (1.0% = 4.068.000/$.00569 = $416.62 = A$1.5% 3.903. 180-day interest rate in Australia = = = = $.2% If you conduct covered interest arbitrage.00569 = 4. ANSWER: D SOLUTION: $400.800.00.438.216 42.77.

08) = €294. feasible B) 6. $312.888. D) the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.109.109.08 = $318.20.10.Chapter 7: International Arbitrage and Interest Rate Parity 44.04%.08 The spot ask quote for the euro is $1. feasible ANSWER: B SOLUTION: $318.04%.000.10 The 180-day forward rate (bid) of the euro is $1. Since this rate is slightly higher than the U. what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation? A) 7. $323. If you conduct covered interest arbitrage. is 6% The 180-day interest rate in Europe is 8% If you conduct covered interest arbitrage. covered interest arbitrage is feasible.109. E) none of these.90.10/$300. C) the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies. interest rate of 6%. not feasible D) 4.40 × $1.08 The 180-day forward rate (ask) of the euro is $1.444.000 to invest The spot bid rate for the euro (€) is $1.10 The 180-day interest rate in the U. feasible C) 6. ANSWER: D . B) the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.000 – 1 = 6. Refer to the previous question. ANSWER: A SOLUTION: $300. Assume the following information: You have $300.96%.777. what amount will you have after 180 days? A) B) C) D) $318. $330.04%.S.07%.10 = €277.00.000/$1.10 217 45.218.00%.80 × (1. not feasible E) 10.S. 46. According to interest rate parity (IRP): A) the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.

The Mexican interest rate is 50%. B) false. B) false. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount. B) false. A) true. A) true. The interest rate in the U. the U. A) premium. Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank’s ask rate and would decrease the other bank’s bid rate. B) false. ANSWER: B 49. For locational arbitrage to be possible. interest rate decreases to 7%. A) true. increase B) discount. According to interest rate parity. International Financial Management Assume that interest rate parity holds. ANSWER: A 51. A) true. B) false. The interest rate on euros is 8%. decrease C) discount. If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank. ANSWER: B 52. A) true. interest rate is 8%. The euro’s forward rate should exhibit a premium of about 3%. ANSWER: B . one bank’s ask rate must be higher than another bank’s bid rate for a currency.218 47.S. is 5%.S. and the U. ANSWER: B 50. locational arbitrage is possible. decrease ANSWER: C 48.S. the peso’s forward _______ will _______. increase D) premium. Subsequently.

If interest rate parity (IRP) exists. Realignment in the exchange rates of banks will eliminate locational arbitrage. A) true. B) false. B) false. ANSWER: B 54. A) true.S. B) false. ANSWER: B 56. a U. then triangular arbitrage will not be possible. A) true. Forward rates are driven by the government rather than market forces. investor would convert dollars to the foreign currency. invest in the foreign country. A) true. B) false. ANSWER: B . and simultaneously sell the foreign currency forward. A) true. ANSWER: A 57. A) true. If interest rate parity (IRP) exists. ANSWER: B 59. To capitalize on high foreign interest rates using covered interest arbitrage. Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.Chapter 7: International Arbitrage and Interest Rate Parity 219 53. A) true. ANSWER: B 58. More specifically. B) false. ANSWER: A 55. B) false. B) false. Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts. market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage. then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country.

A) true. The yield curve of every country has its own unique shape. B) false. The foreign exchange market is an over-the-counter market. A) true. B) false. ANSWER: A .220 International Financial Management 60. ANSWER: B 61.