It is often said that interest rate parity is satisfied when the differential between the interest rates denominated in two currencies equals the forward premium or discount between the two currencies. Explain why this is an imprecise statement when the interest rates are not continuously compounded. ANSWER Answer: Interest rate parity requires the […]
If there is no systematic difference between the forward rate and the expected future spot rate, then the expected forward market return should be ________. A) zero B) greater than one C) equal to the stockholders’ required rate of return D) less than one but greater than zero ANSWER Answer: A
Describe the sequence of transactions required to do a covered interest arbitrage out of British pound and into U.S. dollars. What will be an ideal response? ANSWER Answer: To do a covered interest arbitrage out of ₤ and into U.S. dollars, one would borrow ₤ from the bank at the bank’s ask interest […]
When the forward rate is equal to the expected future spot rate, the forward rate is said to be ________ the future spot rate. A) an information signal for B) an unbiased predictor of C) a hedge for D) in parity with the expected future spot rate ANSWER Answer: B
Collection float is experienced by a payer and is a delay in the receipt of funds. Indicate whether the statement is true or false ANSWER FALSE
The term covered means the investment is ________ transaction foreign exchange risk. A) hedged against B) exposed to C) completely free from D) structured to activate forward contracts that free it from ANSWER Answer: A
The difference between the interest rate that a bank charges on its loans and the interest rate that the banks pay their depositors is known as the A) percent spread. B) arbitrage opportunity. C) bid-ask spread. D) covered interest arbitrage opportunity. ANSWER Answer: C
When parity conditions are not in effect in currency and money markets, traders could make extraordinary profits from a practice known as ________. A) covered interest rate parity B) covered interest rate arbitrage C) triangular arbitrage D) forward market arbitrage ANSWER Answer: B
Which one of the following is NOT a reason for using hedges such as a synthetic forward? A) In some currency markets, forward contracts may not be available, but they can be manufactured using a money market hedge. B) Individual companies are not able to borrow and lend at the interest rates available in the […]
What is the name of the interbank interest rate used in external currency markets that is the most important and used in various cities globally in contractual loan agreements? A) the fed funds rate B) twelfth district interest rate C) LIBOR D) the U.S. prime rate ANSWER Answer: C
