Question

1.Arbitrage can be defined as capitalizing on a discrepancy in quoted prices that does not involve risk but involves an investment of funds. a. True b. False

2.If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciate or depreciate by the same amount as the forward premium or discount, respectively. a. True b. False

3.Research in finance indicates that when an exchange rate deviates far from the value that would have been expected according to purchasing power parity (PPP), it moves towards that value. a. True b. False

4.If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible. a. True b. False

5.Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries. a. True b. False

6. Assume a statistical test is run, where actual exchange rate changes are regressed on the hypothesized exchange rate changes according to the IFE. The hypothesized values of the intercept and coefficient are 0.0 and 1.0, respectively. a. True b. False

Answer 1

1) False.

In arbitrage there is no capital investment so it would be false.

2) True

The forward rate is the difference between the premium or discount. So, this is correct.

3) True

This is true that if the value tends to deviate towards the its expected value according to PPP model.

4) False

Locational arbitrage is when you try to get the profit from the same currency at two different banks or places.

5) False

Purchasing power parity focuses on the purchasing power of a basket of goods and services.

6) True

This is because IFE theory says that expected difference between the exchange rate of two currencies is because of nominal interest rate.

answered by: anonymous