Question 1

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m, traded for dollars at the spot rate and invested at i$ = 2%.

Accepted Answer

Question 2

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

Accepted Answer

The answer of If you borrowed $1,000,000 for one year,...

Question 3

If IRP fails to hold

Accepted Answer

A)  pressure from arbitrageurs should bring exchange rates and interest rates back into line.
B)  it may fail to hold due to transactions costs.
C)  it may be due to government-imposed capital controls.
D)  all of the above

Question 4

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

Accepted Answer

The answer of If you borrowed $1,000,000 for one year,...

Question 5

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward BID exchange rate in $ per € that that satisfies IRP from the perspective of a customer.

Accepted Answer

The answer of USING YOUR PREVIOUS ANSWERS and a bit...

Question 6

Interest Rate Parity (IRP)  is best defined as

Accepted Answer

A)  when a government brings its domestic interest rate in line with other major financial markets.
B)  when the central bank of a country brings its domestic interest rate in line with its major trading partners.
C)  an arbitrage condition that must hold when international financial markets are in equilibrium.
D)  None of the above

Question 7

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i€ = 3%.

Accepted Answer

Question 8

An arbitrage is best defined as

Accepted Answer

A)  a legal condition imposed by the CFTC.
B)  the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits.
C)  the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits.
D)  None of the above

Question 9

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?

Accepted Answer

A)  €1.5291/$
B)  $1.5291/€
C)  €1.4714/$
D)  $1.4714/€

Question 10

A formal statement of IRP is

Accepted Answer

A)    .
B)    .
C)    .
D)    .

Question 11

As of today, the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail?

Accepted Answer

A)  €1.00 = $1.6157
B)  €1.6157 = $1.00
C)  €1.00 = $1.5845
D)  $1.00 × 1.03 = €1.60 × 1.02

Question 12

There is (at least) one profitable arbitrage at these prices. What is it?

Accepted Answer

The answer of There is (at least) one profitable arbitrage...

Question 13

Will an arbitrageur facing the following prices be able to make money?

Accepted Answer

A)  Yes, borrow €1,000,000 at 3.65%; Trade for $ at the bid spot rate $1.40 = €1.00; Invest at 4.1%; Hedge this with a long position in a forward contract.
B)  Yes, borrow $1,000,000 at 4.2%; Trade for € at the spot ask exchange rate $1.43 = €1.00; Invest €699,300.70 at 3.5%; Hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year) . Cash flow in 1 year $237.76.
C)  No; the transactions costs are too high.
D)  None of the above

Question 14

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

Accepted Answer

The answer of If you borrowed $1,000,000 for one year,...

Question 15

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward BID exchange rate in $ per € that satisfies IRP from the perspective of a customer.

Accepted Answer

The answer of USING YOUR PREVIOUS ANSWERS and a bit...

Question 16

Generating exchange rate forecasts with the fundamental approach involves

Accepted Answer

A)  looking at charts of the exchange rate and extrapolating the patterns into the future
B)  estimation of a structural model
C)  substituting the estimated values of the independent variables into the estimated structural model to generate the forecast
D)  both b and c

Question 17

If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?

Accepted Answer

The answer of If you had €1,000,000 and traded it...

Question 18

The price of a McDonald's Big Mac sandwich

Accepted Answer

A)  is about the same in the 120 countries that McDonalds does business in.
B)  varies considerably across the world in dollar terms.
C)  supports PPP.
D)  none of the above.

Question 19

If the annual inflation rate is 2.5 percent in the United States and 4 percent in the U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate, assuming that PPP initially held, is _____.

Accepted Answer

A)  parity
B)  0.9710
C)  -0.0198
D)  4.5

Question 20

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000.

Accepted Answer

A)  This is an example where interest rate parity holds.
B)  This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C)  This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D)  None of the above

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

There is (at least) one profitable arbitrage at these prices. What is it?

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Interest Rate Parity (IRP) is best defined as

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A formal statement of IRP is

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As of today, the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail?

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The price of a McDonald's Big Mac sandwich

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Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate, is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000.

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If IRP fails to hold

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If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?

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USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward BID exchange rate in $ per € that that satisfies IRP from the perspective of a customer.

Correct AnswerverifiedShow Answer

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

Correct AnswerverifiedShow Answer

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i€ = 3%.

Correct AnswerverifiedShow Answer

Generating exchange rate forecasts with the fundamental approach involves

Correct AnswerverifiedShow Answer

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m, traded for dollars at the spot rate and invested at i$ = 2%.

Correct AnswerverifiedShow Answer

If the annual inflation rate is 2.5 percent in the United States and 4 percent in the U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate, assuming that PPP initially held, is _____.

Correct AnswerverifiedShow Answer

An arbitrage is best defined as

Correct AnswerverifiedShow Answer

Will an arbitrageur facing the following prices be able to make money?

Correct AnswerverifiedShow Answer

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward BID exchange rate in $ per € that satisfies IRP from the perspective of a customer.

Correct AnswerverifiedShow Answer

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

Correct AnswerverifiedShow Answer

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?

Correct AnswerverifiedShow Answer

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

Correct AnswerverifiedShow Answer

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USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i_€ = 3%.

Correct Answer
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Correct Answer
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USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m, traded for dollars at the spot rate and invested at i_$ = 2%.

Correct Answer
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