IRP QUESTIONS

1. Bank A quotes the buy price of the British pound as $1.5689 and the ask price at $1.5693. Bank B
quotes the buy price of the British pound as $1.5690 and the ask price at $1.5692. If the trader has
$100,000 to invest. What does the trader do to take advantage of local arbitrage and how much profit
does he make (Assume the transaction costs are negligible )?
a. Buy pounds in bank A, sell pounds in bank B, profit $657.89 b. Buy pounds in bank B,
sell pounds in bank A, profit of $1,000 c. Buy pounds in bank B, sell pounds in bank A,
profit $657.89 d. Arbitrage not possible

2. National Bank quotes the buy price of the euro at $1.3265 and the ask price as $1,3270. City Bank
quoted a buy price of the euro at $1,3250 and an ask price of $1,3255. If you have $1,000,000 to
invest, the profit you make from local arbitrage is (Assuming negligible transaction costs ): a. Arbitrage
does not occur b. $754

c. $1,000
d. None of the sentences are correct

3. A bank quotes the British pound as $1.5690, the Swiss franc (CHF) as $0.9983 and the British pound
as CHF1.5725. If you have $100,000 to invest, what do you do to take advantage of tripartite arbitrage
and how much profit do you make? (Assuming the buying and selling prices are equal, the transaction
costs are negligible .)
a. Use dollars to buy pounds, sell pounds to buy francs, sell francs to buy dollars, profit
$53
b. Use dollars to buy pounds, sell pounds to buy francs, sell francs to buy dollars, profit $1,000 c. Use
dollars to buy francs, sell francs to buy pounds, sell pounds to buy dollars, profit
$101,000
d. Use dollars to buy francs, sell francs to buy pounds, sell pounds to buy dollars, profit $1,000

4. The spot rate of the Swiss franc is $0.9965, the 180-day forward rate of the Swiss franc is $0.9985, the
180-day interest rate in the US is 4% and in Switzerland 3%. If you have $100,000 to invest, then the
rate of return from hedged arbitrage is:
a. 4.21%
b. 2.01%
c. 4% d.
Neither statement is correct because hedging arbitrage is not feasible

5. Assuming that the Swiss franc has a 90-day interest rate of , 90-day interest rate on US dollars is 4%
3% the forward premium or discount of the Swiss franc is:
a. Compensation
9.7% b. 9.7% discount
c. Compensation 0.97%
d. 0.97% discount

6. Which of the following forms of arbitrage takes advantage of cross-rate differences a. Local Arbitrage
b. Hedged interest rate arbitrage c. Trilateral Arbitrage d. None of the sentences are correct

7. The British pound is worth $1.5850 while the euro is worth $1.3185. Value of British Pounds
with euro is

a. € 1.22021
b. € 2.0898 c.
£0.8319 d.
None of the sentences are correct

8. Assuming the one-year interest rate in the US is 5% and in France it is 8%, the spot rate of 1 EUR = 1.3225 USD.
The one-year forward rate that is forecast at interest rate parity will be: a. 1 EUR
= 1.2858 USD b. 1 EUR = 1.3603 USD c. 1 EUR = 1.3225 USD d. None of the
sentences are correct

9. Assume an annual interest rate of 3% in the US, 6% in Europe, and a spot rate of 1 EUR = 1.3225 USD. Calculate
the expected forward rate for the next 3 years, assuming Interest Rate Parity persists. a. 1 EUR = 1.4415 USD b.
1 EUR = 1.1190 USD c. 1 EUR = 1.2134 USD d. None of the sentences are correct

10. Assume the spot rate is ¥84/$ and the one-year forward rate ¥92/$. The one-year interest rate in the US is 5%.
How much is the one-year interest rate in Japan to survive Interest rate parity between the US and Japan markets.
a. 1.15% b. 9.52% c. 15%
d. None of the sentences are correct

11. Suppose you observe the following exchange rate St($/€) = $1.3241 (meaning €1 = $1.3241). One-year
forward rate F1($/€) = $1.3305. The risk-free rate in the US is 5%, in Germany 2%. How does an American
investor make money?
a. Borrow dollars in the US, convert dollars into euros, invest in Germany for 1 year and open a forward contract,
convert euros to dollars at the forward rate b. Borrow euros, convert euros to dollars at the spot rate, invest
in the US at 5% interest and open a forward contract. At the end of the year convert part of the dollars into euros
at the forward rate to repay the debt. c. Arbitrage is not possible d. Do arbitrage but no profit

12. The spot rate of the British pound is $1.5592 and the 180-day forward rate is $1.5610. The difference between
the spot rate and the forward rate above implies:
a. Interest rates in the US are higher than rates
in the UK b. The pound appreciates against the
dollar c. Inflation in the UK is falling d. The
pound is expected to depreciate against the dollar because of high inflation in the US

13. The current interest rate on a Euro yen loan is 6%/year (compounded annually) and the interest rate on a
Euro dollar loan is 9%/year. What is the premium or discount of a 2 year European yen forward contract so
that the Investor cannot do profitable CIA business: a. offset 0.08% b. compensation 5.294 % c. discount
2.75% d. offset 2.83%

14. If the one-year interest rates in the US and UK are 9% and 13% respectively and the spot rate of the pound
is $1.5625. If interest rate parity existed, what would be the forward rate of the pound? a. $1.6198 b. $1.5072
c. $1.7656 d. All 3 statements are wrong

15. If interest rates in the US and Switzerland are 10% and 4% respectively and the 90-day forward rate for the
Swiss franc is $0.3864, what is the spot rate of the franc at interest parity? survival rate?
a. $0.3902
b. $0.3874
c. $0.3653
d. $0.3792

16. Arbitrage is defined as capitalization on quoted spread. In many non-investment countries there is
a tight budget for some time and there is no risk to this strategy. a. Right b. Wrong

17. According to the theory of Interest Rate Parity, if the interest rate in the US is higher than the interest rate in Canada, the forward rate
Canadian dollar term will represent a discount. a. Right b.
Wrong

18. If the UK interest rate is 6% and the US interest rate is 4%, the pound forward rate premium is 2%.
a. Right b. Wrong

19. If the market exists in interest rate parity, foreign investors will have a rate of return equal to the
rate of return of US investors investing abroad. a. Right b. Wrong

20. In tripartite arbitrage, currency transactions are performed in the spot market to capitalize the
difference in cross rates by converting between the three currencies. a. Right b. Wrong