b. $15,625 c. $22,136 d. $31,250. 11. If interest rate parity (IRP) exists, then
ID: 2820117 • Letter: B
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b. $15,625 c. $22,136 d. $31,250. 11. If interest rate parity (IRP) exists, then foreign investors will earn the same returns as u.s. investors. a. True b. False 12. Assume the following bid and ask rates of the pound for two banks as shown below: Bid $1.41 $1.39 Ask $1.42 $1.40 Bank A Bank B As locational arbitrage occurs: a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B b. c. d. will increase. the bid rate for pounds at Bank A will 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 13. Assume the following exchange rates: $1 -NZ$3, NZ$1 - MXP2, and $1 - MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should Mexican peso (MXP) with respect to the U.S. dollar should- a. appreciate; depreciate b. depreciate; appreciate c. depreciate; depreciate d. appreciate; appreciate e. remain stable; appreciate and the exchange rate of the 14. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds? b. 2.40 c. .80 e. none of the aboveExplanation / Answer
Answer 11. If interest rate parity hold good there is no possibilities of arbitrage and foreign investor will earn same return as US investor. Statement is TRUE.
Answer 12. There exit arbitrage opportunity of buying at bank B at $ 1.4 and selling pound at bank a for $ 1.41 per pound. Bid rate for bank A need to reduce and Ask rate for bank B need to increase. Correct answer is option d. the bid rate for pound at bank A will decrease, the ask rate for pound at bank B will increase
Answer 13.
$1` = NZ $3 and NZ $1 = MXP 2 this means as per cross rate $1 = 6 MXP.
Also $1 = MXP5.
Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should appreciate, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should Depreciate.
Correct answer is option a – Appreciate ; depreciate .
Answer 14.
British pound = $1.6
Canadian dollar = $0.8
Value of Canadian dollar in pound = 0.8/1.6 = 0.5
Hence correct answer is option d = 0.5
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