The Canadian Dollar's Forward Rate Should Exhibit A Discount

1. Assume that the existing U.
U.S one year interest rate is 10% and the Canadian one- year interest rate is 11%.
Assume interest rate parity exists. How would the forward rate of the Canadian dollar change?
The change of Canadian dollar is unknown
The Canadian dollar's forward rate should exhibit a premium
The Canadian dollar's forward rate would not change.
The Canadian dollar's forward rate should exhibit a discount
2. The bid-ask quote for Pound/USD at bank A is $1.41-$1.42. The bid-ask quote for Pound/USD at bank B is
$1.39- $1.40. As locational arbitrage occurs:
the bid rate for pounds at Bank A wil increase, the ask rate for pounds at Bank B will increase.
the bid rate for pounds at Bank A wil increase, the ask rate for pounds at Bank B will decrease
the bid rate for pounds at Bank A will decrease, the ask rate for pounds at Bank B will decrease
the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase
3. Which of the following is not correct regarding covered interest arbitrage?
it the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a retum that is exactly
equal to the interest rate in the foreign country
When interest rate parity holds, covered interest arbitrage is not possible
Covered interest arbitrage is a reason for observing interest rate parity (IRP)
All of the answers are correct C
4. Assume that U.S. and Britlsh investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and
the nominal British rate is 13%, then according to the IFE, the British infiation rate is expected to be about
the U.S. inflation rate. and the British pound is expected to
2 percentage points below, appreciate by about 2
2 percentage points above, depreciate by about 2%
3 percetage points above;, deprectate by about 3%
3 percentage points below, appreciate by about 3s
5. Exercises 1: Spot rate of Australian dollar $.600 and 180-day forward rate of Australian dollar $.068. Also,
180-day Australian interest rate 5%. 180-day U.S. interest rate 4%. Given this information, is covered interest
arbitrage worthwhile for Australian investors who have Australian dollars to invest? Explain your answer Your
answer
6. You have $1000,000 to invest. The current spot rate of pound $1.30 and 90- day forward rate of pound =
$1.4. And 03-month deposit rate in U.S. = 3% and 3- month deposit rate in Great Britain- 4%. If you use
covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after
90 days? And would you have a higher rate of return on a foreign investment than a domestic one?
None of the answers are correct.

$1120000, Yes
O$1,040,000, No
O$1,030,000, No
7. Exercise 2b: The U.S 3-month interest rate (unannualized) is 1.5%. The Australian 3-month interest rate is
3.5%. Interest rate parity exists. The expected inflation over this period is 4.8% in the United States and 22%
in Australia. A call option with 3-month expiration date on Australian dollars is available for a premium of
$.03 and a strike price of $.69. The current spot rate of the Australian dollar is $.65. Assume that you beleve
in purchasing power parity. Determine the dollar amount of your profit or loss from buying a forward
contract specifying A$1.000,000
30.000
8. Exercise 2a: The U.S 3- month interest rate (unannualized) is 1.5%. The Australian 3-month interest rate is
3.5%. Interest rate parity exists. The expected infiation over this period is 4.8% in the United States and 2.2%
in Australla. A call option with 3-month expiration date on Australlan dollars is avallable for a premium of
$.03 and a strike price of $.69. The current spot rate of the Australian dollar is S.65. Assume that you beleve
in purchasing power parity. Determine the dollar amount of your profit or loss from buying a call option
contract specifying A$ 1,000.000.
-53000
9. Which of the following is not correct regarding covered interest arbitrage?
if the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly
equal to the interest rate in the foreign country
when interest rate parity holds, covered interest arbitrage is not possible O
Covered interest arbitrage is a reason for observing interest rate parity (iRP)
All of the answers are correct
10. Assume that the one-year interest rate in the U.S. is 7% and in the Australia. is 49%. According to the
international Fisher effect, Australian dollar's spot exchange rate should by about over the year.
appreciate, 2.88%
depreciate, 2.88 %Mon 2
depreciate, 3.74%
appreciate; 3.74%
11. According to the international Fisher effect. if investors in all countries require the same real rate of return,
the differential in nominal interest rates between any two countries:
O is constant over time
O follows their exchange rate movement
O is zero
is due to their inflation differentials
12. Which of the following is TRUE regarding IRP. PPP, and the IFE?
IRP suggests that a currenoys spot rate wil change according to interest rate Oaifferentials
PPP suggests that a currency's spot rate will change according to inflation O aifferentials
The IFE suggests that a currency's forward rate will change according to interest rate O aitferentials
All of the answers are correct
13. 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?
upward pressure on the US. interest rate
upward pressure on the Swiss franc's forward rate.
downward pressure on the Swiss interest rate
upward pressure on the Swiss franc's spot rate
14. Which of the following theories suggests the percentage charnge in spot exchange rate of a currency should
be equal to the interest rate differentia between two countries?
international Fisher effect OFE)
absolute form of PPP
relative form of PPp
interest rate parity GRP)
Assume that annual interest rates in the U.S are 4%, while interest rates in France are 6%? According to IRP, what
shauld the forward rate premium or discount of the euro be?
2%
-1.89%
-2%
-1.89%

The Canadian Dollar's Forward Rate Should Exhibit A Discount

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1. Assume that the existing U.

The change of Canadian dollar is unknown

The Canadian dollar's forward rate should exhibit a premium

The Canadian dollar's forward rate would not change.

The Canadian dollar's forward rate should exhibit a discount

3. Which of the following is not correct regarding covered interest arbitrage?

All of the answers are correct C

2 percentage points below, appreciate by about 2

2 percentage points above, depreciate by about 2%

3 percetage points above;, deprectate by about 3%

3 percentage points below, appreciate by about 3s

None of the answers are correct.

9. Which of the following is not correct regarding covered interest arbitrage?

All of the answers are correct

depreciate, 2.88 %Mon 2

O is constant over time

O follows their exchange rate movement

is due to their inflation differentials

All of the answers are correct

upward pressure on the US. interest rate

upward pressure on the Swiss franc's forward rate.

downward pressure on the Swiss interest rate

upward pressure on the Swiss franc's spot rate

international Fisher effect OFE)

absolute form of PPP

relative form of PPp

interest rate parity GRP)

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