15/04/2021

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Week9 FX Mkt

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1.
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(4 marks)
You scored 4 / 4 marks

(Three-point Arbitrage - slide example)

We observe the following quotes in three places:

In Sydney: USD/AUD = 1.3718 – 1.3728;

In London: USD/GBP = 0.7608 – 0.7616;

In New York: GBP/AUD = 1.8052 – 1.8060.

With the quotes from Sydney and London, we get the correct cross rates of GBP/AUD = 1.8012
– 1.8044.

Simply by eyeballing, we know there is an arbitrage opportunity. To carry out the arbitrage, we
can start with any currency and touch all three FX centers (points).

We find that the price of AUD in NY is 1. cheaper (cheaper/more expensive), thus we will
2. buy (buy/sell) AUD in NY and 3. sell (buy/sell) AUD through Sydney and

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London.

In NY: use £1 million to 4. buy (buy/sell) AUD at 5. {1.8052} = A$ 6.

{1805200} (2 b.p.).

In Sydney: 7. buy (buy/sell) USD at 8. {1.3728} = US$ 9. {1314976.69} (2

b.p.).

In London: 10. buy (buy/sell) GBP at 11. {0.7608} =£ 12. {1000434.27} (2

b.p.).

Profit = £ 13. {434.27} .

Enter the correct answer below.

10

11

12

13

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

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2.
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(2 marks)
You scored 2 / 2 marks

(CIP - slide example modification)

If 𝑆= 0.8465, 𝑖_𝑈𝑆= 2%, 𝑖_𝐺𝐵= 4%, then CIP implied 𝑓 equals to 1. .8507 OR 0.8507 in
three month. (4 d.p.)

If three-month 𝑓 in the market is now quoted at 0.8482, an arbitrageur would 2. sell (buy
/ sell / do nothing with) USD at spot (S) and do the opposite with the forward market quote (𝑓).

If the arbitrageur starts with 1 million of the right currency to do the arbitrage, then his/her profit
in three months would be in 3. USD (USD / GBP) and the amount is 4. 2975.71 (2
d.p.).

Enter the correct answer below.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

3.
Fill in the blanks
(1 mark)
You scored 0 / 1 mark

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You are given the following quotes:

AUD/USD = 0.7764 – 0.7768

USD/HKD = 7.7644 - 7.7649

The cross rates of AUD/HKD would be: 1. 6.0283 - 2. 6.0318 (4 d.p.)

Enter the correct answer below.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

4. The foreign exchange market is organized as an over-the-counter market in which several

hundred dealers stand ready to buy and sell deposits denominated in foreign currencies.

(1 mark)
You scored 1 / 1 mark

True

False

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

5. In the long run, a rise in a country's price level (relative to the foreign price level) causes its
currency to _______, while a rise in the country's relative productivity causes its currency to
__________.

(1 mark)

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You scored 1 / 1 mark

appreciate; appreciate

appreciate; depreciate

depreciate; appreciate

depreciate; depreciate

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

6. Which of the following causes a depreciation of the domestic currency?

(1 mark)
You scored 1 / 1 mark

A lower domestic interest rate due to a lower expected inflation rate.

A decline in the domestic real interest rate.

A decrease in the domestic money supply.

All of the above.

Response Rationale
Please provide a rationale for your answer.

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No rationale provided.

7. An increase in which factor will cause domestic currency depreciation?

(1 mark)
You scored 1 / 1 mark

trade barriers

export demand

import demand

relative productivity

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

8. The theory of purchasing power parity cannot fully explain exchange rate movements because
_______.

(1 mark)
You scored 1 / 1 mark

not all goods are identical in different countries

monetary policy differs across countries

some goods are not traded between countries

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both A and C of the above

both B and C of the above

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

9. Suppose the prevailing exchange rate between the US dollars (USD) and the Indonesian Rupiah
(IDR) is 1 USD for 14,075.5000 IDR. According to the Big Mac Index compiled by the
Economist magazine, the price of a Big Mac in the USA is USD 5.74 while the price of a Big
Mac in Indonesia is IDR 32,000. If the Purchasing Power Parity holds for the Big Mac, which of
the following statements is the most accurate?

(1 mark)
You scored 1 / 1 mark

The IDR is 60.39% undervalued relative to the USD.

The IDR is 60.39% overvalued relative to the USD.

The IDR is 152.48% undervalued relative to the USD.

The IDR is 152.48% overvalued relative to the USD.

The IDR is neither undervalued nor overvalued relative to the USD.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

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The following table lists the foreign exchange rates between the U.S. dollar and the Euro
10.
(EUR) during August 2020:

Date U.S. Dollars per Euro

2020-08-03 1.1750
2020-08-04 1.1766
2020-08-05 1.1898
2020-08-06 1.1856
2020-08-07 1.1776
2020-08-10 1.1756
2020-08-11 1.1764
2020-08-12 1.1796
2020-08-13 1.1818
2020-08-14 1.1833
2020-08-17 1.1869
2020-08-18 1.1928
2020-08-19 1.1898
2020-08-20 1.1862
2020-08-21 1.1775
2020-08-24 1.1803
2020-08-25 1.1818
2020-08-26 1.1813
2020-08-27 1.1824
2020-08-28 1.1901

Which day would have been the best day to convert US$300 to Euros? Which day would have
been the worst?

(1 mark)
You scored 1 / 1 mark

The best day is 2020-08-03. The worst day is 2020-08-18.

The best day is 2020-08-18. The worst day is 2020-08-03.

The best day is 2020-08-04. The worst day is 2020-08-28.

The best day is 2020-08-28. The worst day is 2020-08-04.

Response Rationale
Please provide a rationale for your answer.
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No rationale provided.

9/10 QUESTIONS ANSWERED CORRECTLY

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