1. The following quotes present an arbitrage opportunity.

Bank A: $1.20 = €1
Bank B: €1.10 = £1
Bank C: $1.25 = £1

What is the arbitrage profit in terms of a percentage?
Select one:
a. 5.6%
b. 6.6%
c. 6.3%
d. 5.2%
e. 5.9%

2. One at a time or keep going?
In the spot market, 120 yens can be exchanged for 1 U.S. dollar. An apple costs 265 yens in Japan. If the market is in equilibrium, what should be the price of the apple in the U.S.?
Select one:
a. $2.4456
b. $2.3112
c. 30 yens
d. $2.2083
e. $2.1881

3. "If the inflation rate in the United States is lower than the inflation rate in Japan, other things held constant, the Japanese yen will appreciate against the US dollar according to the purchasing power parity." True or false?
Select one:
a. False
b. True

4 The following quotes present no arbitrage opportunity, so they must describe an equilibrium condition.
For the euro,
Bank A: $1.2-1.23
Bank B: $1.23-1.26

Select one:
a. True
b. False

5. The interest rate is 3% on the dollar and 6% on the pound sterling. Also, the current spot rate is $1.6 = £1 and the one-year forward rate is $1.5 = £1. Is there an opportunity for covered interest arbitrage? If yes, what is the arbitrage profit in terms of a percentage?
Select one:
a. Yes, 1.74%.
b. Yes, 2.02%.
c. Yes, 3.87%.
d. Yes, 4.71%.
e. No.

6. You execute a carry trade in which you borrow 10,000 British pounds and invest in euros. You also use $10,000 of your own money. The duration of the trade is one year. The interest rates and exchange rates are shown in the following:

Pound interest rate: 4%
Euro interest rate: 6%
Current spot rate: $1.20=€1 and €1.30 =£1

You use the current exchange rates as forecasts for those in one year.
What profit would you expect as a percentage of your own fund?
Select one
a. 8.34%
b. 9.56%
c. 10%
d. 8.76%
e. 9.12%

7. “If you borrow in the U.S. dollar, convert the borrowed funds to a foreign currency, earn the interest rate on the foreign currency, and at the end convert the foreign currency back to the dollar and return the dollar loan plus interest, the interest rate on the foreign currency must be higher than the dollar interest rate for you to have a profit on the investment.” True or false?
Select one:
a. False
b. True

8. “Over time, as many carry traders borrow one currency and convert it into another, there is upward pressure on the currency being borrowed, and downward pressure on the currency being purchased. This impact on the exchange rates reduces investor profits.” True or false.
Select one:
a. False
b. True

9. The following quotes present an arbitrage opportunity.
Bank A: $1.10 = €1
Bank B: €1.25 = £1
Bank C: $1.40 = £1

When the equilibrium condition is restored after arbitrage activities, would the number, 1.25, in Bank B go up or down?
Select one:
a. Go up.
b. Cannot be determined by these numbers.
c. Go down.
d. Stay the same.

10. “If two foreign currencies move by the same percentage against the dollar, there is no change in the cross exchange rate between the two currencies.” True or false?
Select one:
a. False
b. True

11. "A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States." True or false?
Select one:
a. False
b. True

12. You execute a carry trade in which you borrow 10,000 British pounds and invest in euros. You also use $10,000 of your own money. The duration of the trade is one year. The interest rates and exchange rates are shown in the following:
Pound interest rate: 4%
Euro interest rate: 6%
Current spot rate: $1.10=€1 and €1.20 =£1
You expect the euro to appreciate in value against the pound by 10% but the exchange rate between the euro and the dollar to remain the same by the end of the year.

What is your expected profit as a percentage of your own fund?
Select one:
a. 15.2%
b. 22.23%
c. 19.75%
d. 17.42%
e. 21.12%

13.Based on the following information, is there an arbitrage opportunity? If yes, what is the arbitrage profit in terms of a percentage?

Bank A: $1.6=€1
Bank B: $1.5=€1

Select one:
a. Yes, 5.6%.
b. No.
c. Yes, 6.15%.
d. Yes, 6.67%.

14. Current one-year interest rate is 9% for the U.S. dollar and 7% for the euro. If the current exchange rate is $1.3 = €1, what is the expected exchange rate in one year?
Select one:
a. $1.324
b. $1.276
c. $1.112
d. $1.00
e. $1.452

15. “You borrow in the U.S. dollar, convert the borrowed funds to a foreign currency, earn the interest rate on the foreign currency, and at the end convert the foreign currency back to the dollar and return the dollar loan plus interest. If the interest rate on the foreign currency is higher than the dollar interest rate, you would definitely make a profit on the investment.” True or false?
Select one:
a. False
b. True

16. Suppose 1-year interest rate is 6% in Britain and 4% in the U.S. In the 1-year forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the current spot exchange rate?
Select one:
a. 1 pound = $1.6189
b. 1 pound = $1.7322
c. 1 pound = $1.5390
d. 1 pound = $1.8903
e. 1 pound = $1.6817

17. Based on the following information, is there an arbitrage opportunity? If yes, what is the profit in terms of a percentage?

For the euro,
Bank A: $1.2-1.23
Bank B: $1.25-1.28

Select one:
a. Yes, 1.63%.
b. Yes, 1.68%.
c. No.
d. Yes, 1.52%
e. Yes, 1.57%

18. Based on the following quotes,
Bank A: $1.2 = €1
Bank B: €1.55 = £1
Bank C: $1.86 = £1
Is there an arbitrage opportunity?
Select one:
a. Yes.
b. No.

19. Two countries, the U.S. and Japan, produce only one good, apple. Suppose the price of apple in the U.S. is $1. and in Japan it is ¥100.The price of apple over the next year is expected to rise to $1.5 in the U.S. and to ¥120 in Japan, what is the expected exchange rate in one year.
Select one:
a. $1=100 yens
b. $1=115 yens
c. $1=80 yens
d. $1=90 yens
e. $1=125 yens

20. The one-year interest rate is 6% on the euro and 2% on the yen. If the euro is selling at a one-year forward discount of 3.25% against the yen, is there an opportunity for covered interest arbitrage
Select one:
a. No.
b. Yes.

21. "If a spot rate turns out different from what the purchasing power parity (PPP) predicted, the spot rate does not necessarily represent a miss-pricing." True or false?
Select one:
a. True
b. False

22. CVC Co. expects the euro to appreciate from its current value of $1.25 to $1.6 in 180 days. It is able to borrow $1 million on a short-term basis. Present short-term interest rates are given in the following table. These rates are annual.
Currency
180-day interest rate
U.S. Dollars 7%
Euro 5%

What is the break-even exchange rate if the firm borrows $1 million to invest in the euro for 180 days?
Select one:
a. $276,000
b. $275,000
c. $277,000
d. $195,000

23. The following numbers exist in current market place:
One-year forward rate for the pound: $1.6.
Current spot rate for the pound: $1.5
One-year interest rate in the UK: 5%
One-year interest rate in the US: 8%

Which is the correct statement in the following?
Select one
a. The spot rate is most likely to go down.
b. These numbers represent an equilibrium condition.
c. The forward rate is most likely to go up.
d. The US interest rate is most likely to go down.
e. The forward rate is most likely to go down.

24. "No risk is involved in an arbitrage activity." True or false?
Select one:
a. False
b. True

25. One year ago, the exchange rate between the pound and the dollar was £1=$1.50. The current exchange rate is £1=$1.49. During the year, the inflation rate was 5% in the U.K. and 7% in the US. Was there a change in the real exchange rate between the pound and the dollar? If your answer is yes, which currency gained in real terms?
Select one:
a. No, there is no change in real exchange rate.
b. Yes, the dollar gained in real term
c. Yes, the pound gained in real term.

1. The following quotes present an arbitrage opportunity. Bank...