MFIN 510 - International Finance: Final Exam Study Guide

d. Never

When does the Global FX market close each day?

a. 4PM Beijing (China) time

b. 4PM London (UK) time

c. 4PM New York (US) time

d. Never

a. Decrease.

What will be the effect on a direct exchange rate quote if the domestic currency appreciates?

a. Decrease.

b. Increase.

c. No change.

a. London (UK)

Which is the largest FX market (in terms of trading volume)?

a. London (UK)

b. Tokyo (Japan)

c. New York City (US)

d. Hongkong (China)

b. We bought 10,000 Euro at the spot exchange of $1.10 USD/EUR and at the same time we sold 10,000 Euro in a three-month forward contract at the forward exchange rate of $1.12 USD/EUR.

Which of the following is an example of an FX swap transaction?

a. We bought 10,000 Euro at the spot exchange of $1.10 USD/EUR and at the same time we bought another 10,000 Euro in a three-month forward contract at the forward exchange rate of $1.12 USD/EUR.

b. We bought 10,000 Euro at the spot exchange of $1.10 USD/EUR and at the same time we sold 10,000 Euro in a three-month forward contract at the forward exchange rate of $1.12 USD/EUR.

c. We bought 10,000 Euro at the spot exchange of $1.10 USD/EUR.

d. We sold 10,000 Euro in a three-month forward contract at the forward exchange rate of $1.12 USD/EUR.

b. More expensive for foreigners to buy U.S. goods.

If the dollar appreciates it becomes:

a. Cheaper for foreigners to buy U.S. goods.

b. More expensive for foreigners to buy U.S. goods.

c. More expensive for foreigners to buy foreign goods.

d. Cheaper for foreigners to buy foreign goods.

a. Is the price of one currency in terms of another.

An exchange rate:

a. Is the price of one currency in terms of another.

b. Between two currencies ensures they are fully convertible.

c. Is most commonly quoted in real terms.

c. 0.7702 EUR per CHF

An executive from Switzerland checked into a hotel room in Spain and was told by the hotel manager that 1 EUR will buy 1.2983 CHF. From the executive's perspective, an indirect exchange rate quote would be:

a. 1.2983 EUR per CHF

b. 0.7702 CHF per EUR

c. 0.7702 EUR per CHF

b. forward contract

In order to minimize the foreign exchange risk exposure on a euro-denominated receivable due from a German company in 100 days, a British company would most likely initiate a:

a. spot transaction

b. forward contract

c. real exchange rate contract

c. ZAR 4200 per million SEK traded

A dealer provides the following quotes:

● CNY/HKD: 0.8422

● CNY/ZAR: 0.9149

● CNY/SEK: 1.0218

Another dealer is quoting the ZAR/SEK cross-rate at 1.1210. The triangular arbitrage profit that can be earned is closest to:

a. SEK 4200 per million ZAR traded

b. ZAR 3671 per million SEK traded

c. ZAR 4200 per million SEK traded

c. Depreciated and the English will find U.S. goods more expensive.

If the exchange rate value of the English Pound goes from $1.75 to $1.50, then the Pound has:

a. Depreciated and the English will find U.S. goods cheaper.

b. Appreciated and the English will find U.S. goods more expensive.

c. Depreciated and the English will find U.S. goods more expensive.

d. Appreciated and the English will find U.S. goods cheaper.

b. USD/EUR

What is the most popular currency pair traded in the global FX market?

a. JPY/USD

b. USD/EUR

c. CNY/HKD

d. USD/GBP

a. 0.9205

A dealer provides the following quotes:

● CNY/HKD: 0.8422

● CNY/ZAR: 0.9149

● CNY/SEK: 1.0218

The spot ZAR/HKD cross-rate is closest to:

a. 0.9205

b. 1.0864

c. 1.2978

b. FX swap transaction.

What type of FX transactions account for the highest trading volume in the global FX market?

a. FX forward transaction.

b. FX swap transaction.

c. FX option transaction.

d. FX spot transaction.

d. 18.29 JPY/HKD

You are given the following FX quotes:

● 150 JPY/USD

● 8.20 HKD/USD

How much is the cross rate between JPY and HKD?

a. 0.0547 USD/HKD

b. 18.29 HKD/JPY

c. 0.0547 JPY/HKD

d. 18.29 JPY/HKD

b. $10,842 profit

You find the following FX quotes in the market, can you make any arbitrage profit? How much profit can you make if you have $1,000,000 USD.

● HSBC Bank: 9.1000 CNY/EUR

● Bank of China: 6.82 CNY/USD

● Bank of America: 1.32 USD/EUR

a. $5896 profit

b. $10,842 profit

c. $19,862 profit

b. Selling Japanese yen and buying US dollar.

To support Japanese exporting companies to sell more products in the US, Bank of Japan can directly intervene the FX market by

a. Buying Japanese yen and selling US dollar.

b. Selling Japanese yen and buying US dollar.

c. Buying US government bonds.

d. Raising interest rates in Japan.

a. 668.45 Euro

Given the following exchange rates, if you want to convert 1000 Canadian dollar to Euro currency, how much Euro will you have?

● 1.10 USD/EUR

● 1.36 CAD/USD

a. 668.45 Euro

b. 808.82 Euro

c. 1496 Euro

d. None of the above

b. Japanese yen depreciated about 25% relative to US dollar.

Last year the Japanese yen was traded at 110 JPY/USD. This year Japanese yen is currently traded at 147 JPY/USD. How much change in JPY currency value from last year to this year?

a. Japanese yen appreciated about 25% relative to US dollar.

b. Japanese yen depreciated about 25% relative to US dollar.

c. Japanese yen appreciated about 34% relative to US dollar.

d. Japanese yen depreciated about 34% relative to US dollar

d. Euro (EUR)

From the US perspective, which of the following currencies is usually quoted in direct quotation?

a. Mexican Peso (MXN) (MXP before 1993)

b. Canadian Dollar (CAD)

c. Japanese Yen (JPY)

d. Euro (EUR)

b. 1.3426

An exchange rate between two currencies has increased to 1.4500. If the base currency has appreciated by 8% against the price currency, the initial exchange rate between the two currencies was closest to:

a. 1.5660

b. 1.3426

c. 1.3340

c. 2.54%

Calculate the relative bid- ask spread based on the following exchange rates: ● USD/GBP - BP: 1.15; AP: 1.18

a. 2.60%

b. 0.85%

c. 2.54%

c. -$25.42

Given the following exchange rates, if you convert $1000 into GBP and then convert the GBP back to USD, how much is your loss in the two transactions? ● USD/GBP - BP: 1.15; AP: 1.18

a. -$26.09

b. -$74.58

c. -$25.42

c. 4666.67 CNY

Given the following exchange rates, if you convert 1000 CAD to CNY, how much CNY should you receive from the dealer?

● USD/CAD - BP: 0.70; AP 0.72

● USD/CNY - BP: 0.13; AP: 0.15

a. 180.56 CNY

b. 1888.89 CNY

c. 4666.67 CNY

d. 5538.46 CNY

c. 5530.30 CNY

Given the following exchange rates, if you convert 1000 CAD to CNY, how much CNY should you receive from the dealer?

● CAD/USD - BP: 1.30; AP 1.32

● CNY/USD - BP: 7.30; AP: 7.33

a. 5615.39 CNY

b. 5638.46 CNY

c. 5530.30 CNY

d. 177.35 CNY

b. Increased, and Eurozone goods are now more expensive to U.S. customers.

Three years ago, the U.S. dollar/euro exchange was 1.32 USD/EUR. Over the last three years, the price level in the United States has increased by 18%, and the price level in the Eurozone has increased by 12%. If the current exchange rate is 1.40 USD/EUR, the real exchange rate over the period has:

a. Increases, and U.S. goods are now more expensive to Eurozone customers.

b. Increased, and Eurozone goods are now more expensive to U.S. customers.

c. Decrease, and Eurozone goods are now more expensive to U.S. customers

b. 0.79 BDE/TOL

At a base period, the CPIs of the countries of Tuolumne (currency is the TOL) and Bodee (currency is the BDE) are both 100, and the nominal exchange is 0.90 BDE/TOL. One year later, the nominal exchange rate is 0.75 BDE/TOL, and the CPI has risen to 110 in Tuolumne and 105 in Bodee. The real exchange rate is closest to:

a. 0.72 BDE/TOL

b. 0.79 BDE/TOL

c. 0.83 BDE/TOL

b. Bid price: 1.0526 AUD/CAD, Ask price: 1.0870 AUD/CAD.

You find the following exchange rates in a FX dealer shop:

● CAD/AUD - BP: 0.92; AP: 0.95

What should be the bid and ask prices for AUD/CAD?

a. Bid price: 1.0870 AUD/CAD, Ask price: 1.0526 AUD/CAD.

b. Bid price: 1.0526 AUD/CAD, Ask price: 1.0870 AUD/CAD.

c. Bid price: 1.0825 AUD/CAD, Ask price: 1.0937 AUD/CAD.

b. Bid: 2.61127 MXP/PEN, Ask: 2.62867 MXP/PEN.

Given the Direct Quotations for the Mexican Peso (MXP) and the Peruvian Nuevo Sol (PEN), determine the MXP/PEN bid-ask prices. Select the closest correct answer.

● USD/MXP - BP: 0.11001; AP: 0.11036

● USD/PEN - BP: 0.28818; AP: 0.28918

a. Bid: 2.62890 MXP/PEN, Ask: 2.64630 MXP/PEN.

b. Bid: 2.61127 MXP/PEN, Ask: 2.62867 MXP/PEN.

c. Bid: 0.03042 MXP/PEN, Ask: 0.03296 MXP/PEN.

c. Bid: 0.8655 AUD/CHF, Ask: 0.8672 AUD/CHF

A bank is quoting the following exchange rates against the US dollar (USD) for the Swiss franc (CHF) and the Australian dollar (AUD):

● CHF/USD - BP: 1.5960; AP: 1.5970

● USD/AUD - BP: 0.7225; AP: 0.7235

An Australian firm asks the bank for an AUD/CHF quote. What cross-rate would the bank quote (for both bid and ask prices)?

a. Bid: 0.4524 AUD/CHF, Ask: 0.5434 AUD/CHF

b. Bid: 1.1531 AUD/CHF, Ask: 1.1554 AUD/CHF

c. Bid: 0.8655 AUD/CHF, Ask: 0.8672 AUD/CHF

c. 52,000 CNY

Given the following exchanges, if you want to convert 10,000 CAD to CNY, how much CNY currency do you expect to receive?

● USD/CAD - BP: 0.78; AP: 0.82

● USD/CNY - BP: 0.12; AP: 0.15

a. 65,000 CNY.

b. 68,333 CNY.

c. 52,000 CNY

d. The trader has lost $6,250.

Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 = €1.00.

a. The trader has lost $625.

b. The trader has lost $66,287.88.

c. The trader has made $6,250.

d. The trader has lost $6,250.

b. Today the XYZ three-month interest is higher than the PQR three-month interest rate.

One year ago, the currency of Xyland (XYZ) was at a three-month forward premium to the currency of Piqua (PQR). Today, the XYZ is at a three-month forward discount to the PQR. Assuming the interest rate parity relationship holds, this change implies that:

a. The XYZ has depreciated relative to the PQR.

b. Today the XYZ three-month interest is higher than the PQR three-month interest rate.

c. One year ago the XYZ three-month interest rate was higher than the PQR three-month interest rate.

b. +41.3

A BRL/MXN spot rate is listed by a dealer at 0.1378. The 6-month forward rate is 0.14193. The 6-month forward premium or discount points (pips) are closest to:

a. -41.3

b. +41.3

c. +299.7

c. 16.9235 MPX/CAD

The interest rate on one-year Canadian government bonds is 0.05% and the interest rate on one-year Mexican government bonds is 2%. The current spot exchange rate between Mexican peso (MXP) and Canadian dollar (CAD) is 16.60 MXP/CAD. According to the covered interest rate parity theory, what should be the reasonable one-year forward exchange rate between Mexican peso (MXP) and Canadian dollar (CAD)? Choose the closest answer below.

a. 0.0728 CAD/MPX

b. 16.2827 MPX/CAD

c. 16.9235 MPX/CAD

d. 0.0614 CAD/MPX

c. Buy €1,000,000 forward for $1.55/€, and you expect to gain $70,000.

The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

a. Sell €1,000,000 forward for $1.50/€, and you expect to gain $120,000.

b. Wait for three months, if your forecast is correct buy €1,000,000 at $1.62/€.

c. Buy €1,000,000 forward for $1.55/€, and you expect to gain $70,000.

d. Buy €1,000,000 forward for $1.50/€, and you expect to gain $120,000.

b. buyer; take; seller; make

The _______ of a forward contract is obligated to ______ delivery and pay for the contracted goods at the forward price; the _______ of a forward contract is obligated to ______ delivery and accept payment for the goods at the forward price.

a. buyer; make; seller; take

b. buyer; take; seller; make

c. seller; make; buyer; take

d. seller; take; buyer; make

c. The forward percentage will be negative.

If the base currency in a forward exchange rate quote is trading at a forward discount, which of the following statements is most accurate?

a. The forward points will be positive.

b. The base currency is expected to appreciate versus the price currency.

c. The forward percentage will be negative.

b. $24,468.09 profit.

You find the one-year interest rate in the US is 5% and the one-year interest rate in Japan is 1%. The spot rate for Japanese yen is 100 JPY/USD, and the one year JPY forward rate is 94 JPY/USD. Can you make any risk-free profit by taking advantage of the interest rate difference between the US and Japan? How much will be the risk-free profit if you can borrow up to 1 million USD or equivalently 100 million JPY?

a. $100,600 profit.

b. $24,468.09 profit.

c. No arbitrage profit.

a. 0.9478

A three-month forward exchange rate in CAD/USD is listed by a dealer at 1.0123. The dealer also quotes 3-month forward points as a percentage at 6.8%. The CAD/USD spot rate is closest to:

a. 0.9478

b. 1.0550

c. 1.0862

b. Interest Rates

When arbitrage trading is able to take place, the difference between the spot and forward exchange rates for a pair of currencies is most likely to reflect the difference between the two countries' domestic:

a. Inflation Rates

b. Interest Rates

c. Growth Rate

c. Appreciated and the Canadians will find U.S. goods cheaper.

If the exchange rate value of the Canadian dollar goes from 1.35 CAD/USD to 1.30 CAD/USD, then the Canadian dollar has:

a. Depreciated and the Canadians will find U.S. goods more expensive.

b. Depreciated and the Canadians will find U.S. goods cheaper.

c. Appreciated and the Canadians will find U.S. goods cheaper.

b. 0.32%.

How much is the relative bid-ask spread in the exchange rates below?

● USD/MXP - BP: 0.11001; AP: 0.11036

a. 0.35%.

b. 0.32%.

c. 0.37%.

a. Buying its home currency.

In order to strengthen the exchange rate of its home currency (i.e., home currency value appreciates), a central bank can directly intervene the foreign exchange market by:

a. Buying its home currency.

b. Increasing the government budget deficit.

c. Cutting the home country interest rate.

c. Never.

The foreign exchange market closes:

a. 4:00 p.m. EST (New York time).

b. 5:00 p.m. GMT (London time).

c. Never.

c. There is no profitable arbitrage opportunity in those FX quotes.

Doug Bernard specializes in triangular arbitrage. He notices the following quotes in the FX market:

● CHF/USD - BP: 1.5971; AP: 1.5986

● AUD/USD - BP: 1.8215; AP: 1.8235

● AUD/CHF - BP: 1.1410; AP: 1.1420

Does Doug Bernard have any arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, how much would he profit if he has $1,000,000 USD? (choose the closest answer)

a. $2246 USD profit.

b. $663 USD profit.

c. There is no profitable arbitrage opportunity in those FX quotes.

b. The foreign exchange market.

The largest and most active financial market in the world is:

a. The global stock market.

b. The foreign exchange market.

c. The global bond market.

b. Your firm will lose market share since your products will become more expensive in the Canadian market.

Suppose that Canada is a major export market for your firm, a U.S.-based multinational corporation. If the Canadian dollar depreciates against the U.S. dollar,

a. Your firm will be able to charge more in US dollar terms while keeping Canadian dollar prices stable.

b. Your firm will lose market share since your products will become more expensive in the Canadian market.

c. Your firm will have a higher profit margin as your manufacturing costs are in US dollars and your sales are in Canadian dollars.

b. Less than 12%

Over the past month, the Swiss Franc (CHF) has appreciated 12 percent against pound sterling (GBP). How much has the pound sterling depreciated against the Swiss Franc?

a. More than 12%

b. Less than 12%

c. 12%

b. JPY depreciated relative to USD by 9.1%

JPY's exchange rate was 100 JPY/USD last year. Currently, JPY is traded at 110 JPY/USD. Has JPY appreciated or depreciated relative to the USD? How much percentage was the change of JPY's value relative to the USD?

a. JPY appreciated relative to USD by 10%

b. JPY depreciated relative to USD by 9.1%

c. JPY depreciated relative to USD by 10%

b. $7751.94 profit.

You find the following exchange rates offered at two dealer shops. How much arbitrage profit can you make if you have $1,000,000 USD?

● Dealer A - BP: 1.28 CAD/USD; AP: 1.29: CAD/USD

● Dealer B - BP: 1.30 CAD/USD; AP: 1.32: CAD/USD

a. No arbitrage profit.

b. $7751.94 profit.

c. $31,250 profit.

a. 112.5747

A trader is quoted the following exchange rates:

● USD/EUR - Spot: 1.3915; Expected Spot in 1 yr: 1.4028

● USD/GBP - Spot: 1.5540; Expected Spot in 1 yr: 1.5635

● JPY/USD - Spot: 78.95; Expected Spot in 1 yr: 80.25

The expected spot JPY/EUR cross rate in one year is closest to:

a. 112.5747

b. 56.7373

c. 109.8589

a. 15,152 CAD loss

Given the following exchange rates:

● CAD/USD - BP: 1.30; AP: 1.32

If you convert 1,000,000 CAD into USD, and then convert USD back to CAD, how much money will you lose to the dealer? (choose the closest answer)

a. 15,152 CAD loss

b. 20,000 CAD loss

c. 37,037 CAD loss

c. Forward contract buyer has the right but no obligation to buy foreign currency in the forward contract.

Which of the following statements is incorrect?

a. Forward market involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today.

b. Forward contract seller has the obligation to sell foreign currency in the forward contract.

c. Forward contract buyer has the right but no obligation to buy foreign currency in the forward contract.

a. 84,848.48 GBP

You checked the foreign exchange rate quotes posted by the Bank of America as follows:

● USD per GBP - BP: 1.20; AP: 1.32

● USD per MXP - BP: 0.56; AP: 0.58

You have 200,000 Mexican Pesos (MXP) and would like to convert it into British Pounds (GBP). How much British pounds would you receive from the Bank of America? (choose the closest answer)

a. 84,848.48 GBP

b. 96,666.67 GBP

c. 87,878.79 GBP

b. Chinese Yuan (CNY)

Which of the following foreign currencies is usually quoted by Indirect Quotation (from the US perspective)?

a. British Pound (GBP)

b. Chinese Yuan (CNY)

c. Australian Dollar (AUD)

d. Euro (EUR)

c. $48,642 USD profit.

You find the following FX quotes in the market, can you make any triangular arbitrage profit? How much is your profit if you have $1,000,000 USD? (choose the closest answer)

● HSBC Bank - 10.90 CNY/GBP

● Bank of China - 7.32 CNY/USD

● Bank of America - 1.42 USD/GBP

a. $46,385 USD profit.

b. No arbitrage profit. It will result in 11,375 USD loss.

c. $48,642 USD profit.

a. Involve the simultaneous sale (or purchase) of spot ForEx against a Forward purchase (or sale) of approximately an equal amount of the foreign currency.

Foreign exchange swap transactions:

a. Involve the simultaneous sale (or purchase) of spot ForEx against a Forward purchase (or sale) of approximately an equal amount of the foreign currency.

b. Involve trades of one foreign currency for another without going through USD.

c. Account for less than 5% of the foreign exchange trading.

c. 5.20 - 6.83 CNY/CAD.

Given the following exchanges, calculate the cross rates for CNY/CAD (closest answer):

● USD/CAD - BP: 0.78; AP: 0.82

● USD/CNY - BP: 0.12; AP: 0.15

a. 0.15 - 0.19 CNY/CAD.

b. 5.47 - 6.50 CNY/CAD.

c. 5.20 - 6.83 CNY/CAD.

c. Exports from Australia to Europe have become relatively more expensive to European residents.

At a base period, the normal exchange rate for Euro (EUR) and Australian dollar (AUD) is 0.61 EUR/AUD. Two years later, if the normal exchange rate is 0.62 EUR/AUD, the Consumer Price Index (CPI) in Europe is 106, and the CPI in Australia is 110:

a. The purchasing power of one EUR in terms of Australian goods has increased.

b. The real EUR/AUD exchange rate has decreased.

c. Exports from Australia to Europe have become relatively more expensive to European residents.

c. 0.76 CAD/USD

A Canadian tourist wants to exchange CAD for USD at a local branch of Bank of America. From the tourist's perspective, a direct exchange rate quote would be:

a. 1.12 USD/EUR

b. 1.32 USD/CAD

c. 0.76 CAD/USD

b. USD against EUR

What is the most commonly traded currency pair in the foreign exchange market?

a. CAD against USD

b. USD against EUR

c. CNY against HKD

d. JPY against USD

a. The real exchange rate of MXP is 0.9251 so Big Mac is cheaper in Mexico.

The nominal exchange rate between USD and MXP is 0.058 USD/MXP. A Big Mac hamburger costs 89 MXP in Mexico and $5.58 USD in the United States. According to the Big Mac prices, what is the real exchange rate of USD/MXP and how to interpret the real exchange rate?

a. The real exchange rate of MXP is 0.9251 so Big Mac is cheaper in Mexico.

b. The real exchange rate of MXP is 1.0810 so Big Mac is cheaper in Mexico.

c. The real exchange rate of MXP is 0.9251 so Big Mac is more expensive in Mexico.

c. 2.00

An exchange rate between two currencies has decreased to 1.80. If the base currency has depreciated by 10% against the price currency, the initial exchange rate between the two currencies was closest to:

a. 1.98

b. 1.62

c. 2.00

c. 5.7837 - 6.8871 MXP/CAD.

Given the following exchange rates, calculate the cross rates for MXP/CAD.

● USD/MXP - BP: 0.11; AP: 0.13

● CAD/USD - BP: 1.32; AP: 1.33

a. 0.1452 - 0.1729 MXP/CAD.

b. 10.2308 - 12.00 MXP/CAD.

c. 5.7837 - 6.8871 MXP/CAD.

c. 0.0991

A dealer provides the following quotes:

● CNY/CAD - 5.8422

● CNY/GBP- 9.9149

● CNY/HKD - 0.9818

The spot GBP/HKD cross-rate is closest to:

a. 10.0987

b. 9.7344

c. 0.0991

a. ((1.19593 USD / 1 GBP) - (2.1 USD / 1 GBP)) * 10,000 GBP = -1,407 USD

b. ((1.9593 USD / 1 GBP) - (1.90 USD / 1 GBP)) * 10,000 GBP = 593 USD

You expect to receive £10,000 British pound sterling in six months from a customer. You are afraid that the pound exchange rate may depreciate.

The current 6-month forward rate of pound is $1.9593 USD/GBP.

To avoid the exchange rate risk, you can sell a 6 months pound forward contract with underlying assets of 10,000 pounds.

Now, you have the "obligation" to sell 10,000 pounds at $1.9593 USD/GBP in six months.

a. What if the pound exchange rate turns out to be $2.1 USD/GBP in 6 months? How much USD do you expect to receive in the forward contract? How much "gain/loss" do you make in the forward contract?

b. What if the pound exchange rate turns out to be $1.9 USD/GBP in 6 months? How much US dollars do you expect to receive in the forward contract? How much "gain/loss" do you make in the forward contract?

1.9593 USD1 GBP-1.90 USD1 GBP*10,000 GBP=593 USD

1. F = (0.50 USD / 1 CHF) / ((1 + 4%) / (1 + 8%))

2. F = 0.50 USD/CHF * (1.04 / 1.08)

3. F = 0.50 USD/CHF * 0.9629

4. F = 0.4815 USD/CHF

If the U.S. has 4% interest rate per annum while Switzerland has 8% interest rate per annum. The spot exchange rate of Swiss Franc is 0.50 USD/CHF.

According to the covered interest rate parity, what should be the one-year forward rate between CHF and USD? (USD/CHF)

1. Borrow $1,000,000 and convert the US dollar to Swiss Franc at the spot rate:

1.1. 1,000,000 USD * (0.50 USD / 1 CHF)

1.2. 1,000,000 USD * (1 CHF / 0.50 USD)

1.3. 1,000,000 * 2 CHF = 2,000,000 CHF

2. Invest 2,000,000 CHF at 8% interest for one year:

2.1. F = 2,000,000 CHF * 1+8% = 2,160,000 CHF

3. Sell a one-year Fwd contract on CHF (lock in the forward rate at 0.495 USD/CHF)

4. One year later, convert future value of CHF into USD by using the Fwd contract:

4.1. 2,160,000 CHF * (0.495 USD / 1 CHF) = 1,069,200 USD

5. Return the US dollar loan plus the one-year interest:

5.1. 1,000,000 USD * (1 + 4%) = 1,040,000 USD

6. Arbitrage Profit

6.1. 1,069,200 USD - 1,040,000 USD = 29,200 USD

The U.S. has a 4% interest rate per annum.

Switzerland has an 8% interest rate per annum.

The spot exchange rate of Swiss Franc is 0.50 USD/CHF.

The one-year forward rate of Swiss Franc is also 0.495 USD/CHF.

If you can borrow up to $1,000,000, how can you use covered interest arbitrage to make risk-free profits from the interest rate differential between the two countries?

1. F = 17 MXP/USD * ((1 + 9%) / (1 + 2%)) = 18.1667 MXP/USD

1.1. (F USD = 18.1667 MXP/USD) > (F market = 18 MXP/USD) = Borrow USD

2. Borrow 1mm USD

3. Convert USD to MXP at S 0 = 17 MXP/USD

3.1. 1,000,000 USD * (17 MXP / 1 USD) = 17,000,000 MXP

4. Invest MXP at 9% for one year.

4.1. 17,000,000 MXP * (1 + 9%) = 18,530,000 MXP

5. Convert MXP back to USD at F=18 MXP/USD

5.1. 18,530,000 MXP * (18 MXP / 1 USD)

5.2. 18,530,000 MXP * (1 USD / 18 MXP)

5.3. 18,530,000 * 0.0556 USD = 1,029,444.44 USD

6. Payback USD loan + interest.

6.1. 1,000,000 USD * (1 + 2%) = 1,020,000 USD

7. Arbitrage Profit

7.1. 1,029,444.44 USD - 1,020,000 USD = 9,444.44 USD

i USD = 2%

i MXP = 9%

S 0 = 17 MXP/USD

F 1 - year = 18 MXP/USD

If you can borrow 1mm USD or 17mm MXP, how much profit can you make in one year?

a.

1. F = (100 JPY / 1 USD) * (((1 + (0.05% / 2)) / (1 + (3% / 2)))

2. F = 100 JPY/USD * (100.025% / 101.5%)

3. F = 100 JPY/USD * 98.5468% = 98.5468 JPY/USD

4. (F JPY = 98.5468 JPY/USD) < (F market = 100 JPY/USD) = Borrow JPY

b.

1. Borrow 100mm JPY today for 6 months.

2. Convert JPY to USD at S0=100 JPY/USD

2.1. 100,000,000 JPY * (1 USD / 100 JPY) = 1,000,000 USD

3. Invest USD for 6 months

3.1. i USD = (3% / 2) = 1.5%

3.2. 1,000,000 USD * (1 + 1.5%) = 1,015,000 USD

4. Convert USD to JPY at Forward rate in the market: 101 JPY/USD

4.1. 1,015,000 USD * (101 JPY / 1 USD) = 102,515,000 JPY

5. Pay back JPY loan + Interest

5.1. 100,000,000 JPY * (1 + (0.05% / 2) = 100,025,000 JPY

5.2. 102,515,000 JPY - 100,025,000 = 2,490,000 JPY

5.3. 2,490,000 JPY * (1 USD / 101 JPY) = 24,653 USD

c.

1. F = 98.5468 JPY/USD

You find the one-year interest rate in the US is 3% and the one-year interest rate in Japan is 0.05%. The spot rate for JPY is 100 JPY/USD, and the 180-day JPY forward rate is 101 JPY/USD.

a. Can you make any risk-free profit by taking advantage of the interest rate difference between the US and Japan?

b. How much will be the risk-free profit (if you can borrow up to 1mm USD or equivalently 100mm JPY)?

c. How much should be the “correct” 180-day JPY forward rate so that there is no profitable arbitrage anymore?

d. All of the above.

What are the conditions for the "Law of One Price" ?

a. If the identical product or service can be sold in two different markets.

b. No restrictions exist on the sale of the identical product or service.

c. If the transportation costs of moving the identical product or service do not exist.

d. All of the above.