Question 1
The bid-ask quote at Bank X for the New Zealand dollar is .33 - .335 USD/NZD.
At Bank Y, the bid-ask quote is .32 - .325 USD/NZD.
Given this information, what would be your gain if you use 1,000,000 USD and execute one cycle of locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
Answer
10 points
Question 2
Assume the following information:
1-year interest rate on U.S. dollars = 12%
1-year interest rate on Singapore dollars = 10%
1-year forward rate of Singapore dollars = 0.412 USD/SGD
Spot rate of Singapore dollar = 0.400 USD/SGD
Given this information, how much profit can be made with covered interest arbitrage, by borrowing 1 million USD?
Answer
10 points
Question 3
In the previous question, what would be the 1 year forward rate on the SGD if the interest rate parity was in effect? (Enter answer accurate to 4 decimal places.)
Answer
10 points
Question 4
Assume the following information for a bank quoting on spot exchange rates:
Exchange rate of Singapore dollar in USD = 0.32 USD/SGD
Exchange rate of pound in USD = 1.50 USD/GBP
Exchange rate of pound in Singapore dollars = 4.50 SGD/GBP
Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
Answer
USD/SGD goes up |
USD/SGD goes down |
USD/GBP goes up |
USD/GBP goes down |
SGD/GBP goes up |
SGD/GBP goes down |
10 points
Question 5
In the previous problem, if you were to conduct one cycle of triangular arbitrage using 1000 USD to start with, what would be your net profit?
Answer
10 points
Question 6
Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. What is the forward premium on the EUR? (Enter answer in percents, accurate to 2 decimal places.)
Answer
10 points
Question 7
Assume IRP holds, and the US interest rate is 3%, and Japan rate is 2%. If a person from Japan were to conduct covered interest arbitrage using his own funds, what net interest rate would he earn? (Enter answer in percents, accurate to 2 decimal places.)
Answer
10 points
Question 8
Assume the following information:
USD/AUD, bid/ask: 0.67 / 0.69
USD/MXP, bid/ask: 0.074 / 0.077
MXP/AUD, bid/ask: 8.2 / 8.5
Assume you have 100,000 USD to conduct one cycle of triangular arbitrage. What will be your profit from implementing this strategy? Remember to pay careful attention whether you're trading at the bid or the ask with the bank.
Answer
10 points
Question 9
Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, what is the expected inflation rate in the U.S.? (Enter answer as percent, accurate to 2 decimal places.)
Answer
10 points
Question 10
In the previous problem, if the IFE holds, what is the expected change in the value of the British pound relative to the dollar (the USD/GBP exchange rate)? (Enter answer in percent, accurate to 2 decimal places.)
Answer
10 points
Question 11
The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen 0.0075 USD/JPY. According to the purchasing power parity and holding everything else constant, what should be the new JPY exchange rate at the end of the year? (Enter answer accurate to 4 decimal places.)
Answer
10 points
Question 12
Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on euros is 8%. You have 100,000 USD to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is 1.40 USD/EUR. What will be the expected net yield on your investment if you invest in euros? (Enter answer in percent, accurate to 2 decimal places.)
Answer
10 points
Question 13
The 1 year interest rate in the US is 3%, while the 1 year interest rate in the UK is 5%. The spot exchange rate for the pound is 1.7 USD/GBP. According to the IRP, what must be the 1 year forward rate on the pound? (Enter answer accurate to 2 decimal places.)
Answer
10 points
Question 14
In the previous question, what is the forward premium on the pound? (Enter answer in percent, accurate to 2 decimal places.)
Answer