# Homework Study Questions Module#8

Homework Study Questions Module#8

Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:

British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S. | ||

U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S. | ||

U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S. | ||

U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S |

Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?

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upward pressure on the Swiss franc’s spot rate. | ||

upward pressure on the U.S. interest rate. | ||

downward pressure on the Swiss interest rate. | ||

upward pressure on the Swiss franc’s forward rate. |

Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$15,385. | ||

$15,625. | ||

$22,136. | ||

$31,250. |

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.

forward realignment arbitrage | ||

triangular arbitrage | ||

covered interest arbitrage | ||

locational arbitrage |

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

covered interest arbitrage | ||

locational arbitrage | ||

triangular arbitrage | ||

B and C |

If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

U.S. investors could possibly benefit from covered interest arbitrage. | ||

British investors could possibly benefit from covered interest arbitrage. | ||

neither U.S. nor British investors could benefit from covered interest arbitrage. | ||

A and B |

A firm’s cost of ____ reflects an opportunity cost: what the existing shareholders could have earned if they had received the earnings as dividends and invested the funds themselves.

debt | ||

retained earnings | ||

short-term loans | ||

none of the above |

According to your text, which of the following is not a factor that increases an MNC’s cost of capital?

higher exposure to exchange rate risk. | ||

higher exposure to country risk. | ||

an increase in the risk-free interest rate. | ||

an increase in the size of the MNC. |

Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

spot rate of peso increases; forward rate of peso decreases. | ||

spot rate of peso decreases; forward rate of peso increases. | ||

spot rate of peso decreases; forward rate of peso decreases. | ||

spot rate of peso increases; forward rate of peso increases. |

Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars = 12%. 1-year deposit rate offered on Singapore dollars = 10%. 1-year forward rate of Singapore dollars = $.412. Spot rate of Singapore dollar = $.400. Given this information which is true?

interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. | ||

interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. | ||

interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. | ||

interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. |