Chap 7 TCQT

51. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

• a. True
• b. False

52. The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro's forward rate should exhibit a premium of about 3%.

• a. True
• b. False

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

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

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

4. If interest rate parity exists, then ____ is not feasible.

• a. forward realignment arbitrage
• b. triangular arbitrage
• c. covered interest arbitrage
• d. locational arbitrage

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.

6. When using ____, funds are not tied up for any length of time.

• a. covered interest arbitrage
• b. locational arbitrage
• c. triangular arbitrage
• d. B and C

7. When using ____, funds are typically tied up for a significant period of time.

• a. covered interest arbitrage
• b. locational arbitrage
• c. triangular arbitrage
• d. B and C

8. Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

• a. should exhibit a discount.
• b. should exhibit a premium.
• c. should be zero (i.e., it should equal its spot rate).
• d. B or C